Brexit Uncertainty Tax hits middle market business

The time is almost here. As we approach what may be the Brexit end-line, are we starting to see a little light at what feels like the end of a very long tunnel? 

Perhaps. But the uncertainty businesses still face is weighing heavily on middle market firms. This inability to make decisions and move forward is proving costly to business.

Nonetheless it appears that the keep calm and carry on mindset is enduring through the Brexit saga. Many business leaders feel a little more positive over the impact it will have over the long term, following a final agreement to leave the EU. Yet with the Article 50 deadline in sight, it is clear from our most recent findings that middle market businesses have becoming increasingly concerned about the short-term prospects of Brexit and that of a no deal outcome. What’s more, businesses still crave more clarity around what the future economic and political landscape might look like and how to prepare for it and this is negatively affecting UK business with a virtual ‘uncertainty tax’.

In our latest quarterly survey of over 300 middle market business leaders, RSM’s Brexit Monitor, conducted by YouGov, found that feeling towards Brexit and the UK’s departure from the EU in the short term has soured. 

Overall, business sentiment about the impact of Brexit on their own company performance over the next two years dropped to its lowest quarterly level since RSM started the survey in Q3 of 2017, registering just 90 on RSM's Brexit Monitor index. This is the lowest point ever recorded on the index, which measures sentiment between a range of 0-200, where any score above 100 is positive, and any score below 100 is negative. 

Businesses also hold an equally negative view of the two-year impact of Brexit on the UK economy, with the index registering its lowest ever score of 90. This is also a record low and marks the first time where confidence in company’s own prospects has reached parity with confidence in the wider economy (the former traditionally outstripping the latter).

However, viewed over a longer five-year horizon, middle market businesses expressed a greater degree of optimism about the impact on their company's performance with average sentiment just straying into positive territory with a score of 103.

Sentiment amongst most sectors has dropped into negative territory. In fact, pessimism is at an all-time high, with 66 per cent of the manufacturing sector becoming particularly downbeat about the UK’s future, a 30 per cent increase on the last quarter. Close behind is financial services and perhaps more surprisingly technology, media and telecoms (TMT) which has up until this point shown itself to be the most consistently optimistic sector. 

Over half of both these sectors expect a damaging outcome in the short term. Yet interestingly, two sectors have bucked the trend. The construction sector has seen a giant leap in optimism, with an overwhelming 68 per cent believing Brexit will have a positive effect. Another interesting finding reveals that the consumer sector has also seen an uptick in optimism, perhaps demonstrating that the sector has finally come to terms with even the most pessimistic view.

This compares starkly to the manufacturing sector with 66 per cent expecting a negative effect. This has almost doubled since the last quarter, while TMT has seen the biggest drop overall.

The top concern for most businesses is job security and sources of workers, understandable amidst the uncertainty of what each Brexit deal will mean for immigration and employment; 38 per cent stating either losing workers or their ability to hire them will have the biggest impact on their business. Indeed, a quarter (27 per cent) believe retaining talent is a big problem for their company, as opposed to only 12 per cent when we asked in the first survey back in Q3 of 2017. 

Simon Hart, RSM's Brexit lead partner said: ‘As the deadline approaches and the risk of no deal Brexit increases, the reality of the challenges facing middle market businesses is raising blood pressures in some UK Board rooms – at least in the short term. The longer-term outlook still remains broadly positive. The middle market is seemingly less concerned about the economic warnings suggested by some commentators and instead more focussed on opportunities that might arise.

Interestingly, the closer we potentially get to Brexit, business leaders appear to be taking fewer steps to prepare. A sort of paralysis seems to have set in as everyone just waits to see what actually happens, and if there is a short extension to Article 50 whilst the deal is tweaked to get it across the line. The uncertainty tax of Brexit is negatively affecting UK GDP and growth overall.'

Hart believes there’s a natural push and pull between people’s demand for clarity and their frustration at the lack of it. ‘With the government continuing to evade decisions, sector leaders seem to be pushing for a more dramatic outcome, if only to spark some sort of action to move forward’. 

A fifth of respondents said they wish for Parliament to cancel Brexit altogether, the most preferred option in Scotland as well (rising to a third amongst Scottish respondents), while around a sixth support a second referendum. Just over one in ten support immediate withdrawal with no deal. 

Simon Hart notes that ‘similar to previous quarters, a significant number expect a no deal to be advantageous, yet there has been an overall increase in those expecting such a scenario to be ‘harmful’ or even ‘catastrophic’. Certainly, this is true across the manufacturing sector, which is seeing the biggest increase in those seeing no deal as harmful, although construction and consumer have also seen substantial increases in those expecting it to be beneficial’. 

Hart adds: 'I think Boards should use the remaining time to focus on some key scenario planning and ensure they are either ready for material eventualities or have identified the key risks and have taken a considered view on whether they do something or not based on that work.'

For further information, view RSM’s five-point plan on how to prepare for Brexit.

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