How does capital view Brexit?

The lull before the storm…

Brexit has not yet created the economic turmoil some feared; everyone went on holiday and the sky did not fall in. Indeed the EY ITEM Club has upgraded its outlook for UK GDP growth in 2017 to 0.8% from 0.4% it was forecasting in July. However, 0.8% growth is hardly an excuse for a party and the storm clouds appear to be gathering. The responses to our latest survey of Global and UK businesses, EY’s 15th Capital Confidence Barometer, highlights the risks of Brexit to the UK’s attractiveness to capital.

…with no collapse in confidence…

The survey shows UK companies have reacted calmly to the result of the referendum and placed Brexit within a broader landscape of risk and opportunity. This is also true for global corporates who do not see Brexit as one of the top five risks that they face today. The UK confidence level moved from ‘positive’ to ‘stable’ six months ago and the vote to leave the EU has not moved the dial much further. In CCB15, 87% of UK respondents saw the outlook for the UK economy as “stable”.


The data also shows domestic political stability and currency volatility topping the list of specific UK company concerns – both ostensibly Brexit related issues. It is the next steps and outcomes that concern UK companies the most, not the decision to leave the EU per se.

…but worrying signs are emerging…

When we probe further, labour (both recruitment and retention) consistently emerges as one of the biggest post-Brexit anxieties. The survey shows that 92% of UK respondents expect Brexit to affect their ability to hire skilled workers and 69% expect problems in hiring unskilled workers. Retention of unskilled workers is a less significant concern, but 69% are concerned about retaining skilled employees.


Our survey responses also indicate that almost a third of UK respondents expect their investment levels to fall by over a fifth in the next year. When we aggregate the replies, we estimate that capital expenditure may fall by 5% in 2017 compared to the outlook before the referendum.

If companies are expecting challenges with their workforce and are cutting back on capital investment, then the longer-term outlook begins to appear worrying. The UK economy is at risk of slipping into a slow and gradual decline as companies reduce their exposure and presence in the UK.

…with M&A intentions weakening…

The number of UK respondents looking to transact in the next year has dropped from 59% to 48% – hardly surprising in these more complex times. Nevertheless, M&A appetite amongst domestic businesses remains above the long-term average of 41% due to the strong imperatives to transact. External investors may well see the UK as cheap due to the fall in the value of sterling and this may give a boost to inbound investment, although the UK’s somewhat uncertain economic prospects may temper their enthusiasm.


…and a potential blind spot on sterling.

I was very surprised to see that two-thirds of our survey respondents expect sterling to bounce back in the next two years to its pre-referendum level. Other than experience of sterling crises generally proving to be temporary, it is hard to imagine what is driving these responses. Only 21% expected it to fall further when they answered our survey over the summer – a position that has proven wildly optimistic.


Attitudes may well have changed over the last week but UK companies risk being very wrong on the currency. A sterling value well below $1.30 has profound implications for importers, who should be considering the option of investing more in UK supply chains to counteract expensive imports. Many exporters will also contend with higher input prices; but the falling pound should boost their opportunities abroad – especially while the UK remains part of the EU. It appears the UK trade sector is potentially misinterpreting the currency position and this could lead to erroneous decisions.

When asked about opportunities for trade, our respondents had a clear list of countries as priorities for trade deals: the USA, India, Australia, South Africa and Canada. It does appear language and historic ties still play a part in shaping trade.

The UK will have to work hard to remain attractive.

The weak pound provides an incentive for overseas buyers, but the UK’s attractiveness has certainly taken a hit. The responses to CCB15 shows the UK falling out of the top five Global investment destinations for the first time in eight years.


When we look at intentions to invest in the UK, there is a wide variation in the balance between positive and negative respondents by country as shown below.


The most positive responses come from India and Europe; but there is negative sentiment from countries who previously favoured the UK as a gateway into Europe amongst the North American, Japanese and Chinese respondents.

The holiday is over and it is time to act

Markets have been in a state of flux since the end of summer as they tried to come to grips with the realities of Brexit and worries elsewhere. The Conservative Party Conference set down clear markers and the markets, especially the foreign exchange markets reacted.

It is now time to act. Starting with reviewing current plans against the emerging outlook, with a ”hard” Brexit increasingly appearing to be the base case to be used for planning purposes. Once any short-term defensive measures have been put in place, move on to the portfolio and consider by geography and competence how appropriate the mix looks. It may well be that acquisitions and divestments are required to reshape the business for the world after Brexit.

The Capital Confidence Barometer is a part of our Economics for Business programme which provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.


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