Our global economy: down but not out

Our global economy: down but not out

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As global experts in foreign exchange and international payments, moneycorp is delighted to partner with supply chain risk and performance management specialists, Achilles.

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In an inaugural webinar, we take a deep dive into the potential implications that recent events such as Brexit and the pandemic are predicted to have on supply chains for UK businesses.

Alongside hosts, Stuart Wheeler, Partnerships director at Achilles, and Lee McDarby, CEO of UK International Payments at moneycorp, we hear from special guests, Director General for the British Chambers of Commerce, Dr Adam Marshall, and Chief Economic Advisor and Board member at the Centre for Economics and Business Research, Vicky Pryce, on the risks and opportunities that UK businesses currently face in the aftermath of momentous change.

While both Brexit and the pandemic may have offered UK businesses an unprecedented opportunity to explore new global relationships and re-examine their supply chains, there are hidden risks and new, unexpected costs to be navigated, too. For the UK and, indeed, the wider global economy, this is a time of great uncertainty. However, walking us through the latest forecasts from the International Monetary Fund, Vicky Pryce notes that while market uncertainty remains at an historic high, the largely successful vaccine rollout and a subsequent return to normal life are predicted to strengthen the global economy in 2021. But the question is, when will that improvement start? And where does the UK in particular stand on this timescale?

‘The hit in 2020 has been really substantial. Among the G7, [the UK] had the worst fall in GDP’, proclaims Pryce, which she attributes to three key factors: the high percentage of services in our economy, the fact that our lockdown measures were slower to be implemented than in other countries, and the impact of Brexit, in particular the anticipation of a no deal outcome. ‘The faster you fall the faster you’re meant to pick up’, she says, but unfortunately, that’s not what the data tell us is happening, at least not yet. What it does show, she explains, is that with a bit of luck, the UK economy should continue to strengthen through to 2022, but ‘a lot depends on the types on policies we see in the future and the extent to which the government continues to support the recovery’. 

Vicky Pryce on the State of the Economy and the Impact of Brexit on Trade Barriers

The concurrence of Brexit and Covid-19 has made it difficult to interpret the isolated effect of one or the other on business. What we do know, however, is that the forecasts are pretty dire about the impact of Brexit. ‘We have seen quite a lot of problems in terms of trade with Europe’, says Pryce. ‘UK exports are expected to come down very significantly, and that could infiltrate other opportunities for onshoring or substituting with selling to other countries. Overall, UK trade will suffer, not just trade in relation to the EU, but total nuclear trade.’ The resulting losses, she continues, ‘are likely to be particularly significant when it comes to services.’

Returning to the issue of uncertainty in the current business climate, Pryce hones in on the lack of consideration given to Financial Services in particular, proclaiming that while there are more productive conversations beginning now, ‘so far in the agreement with the EU, the financial sector has been more or less forgotten. There are jobs all over the UK’, she stresses, ‘that rely on a vibrant financial sector, and we’ve already seen how much money is moving to other centres in Europe. The difficulty now is having to have individual country agreements so that even basic financial services can carry on being offered across Europe. It’s a big issue that’s going to worry us for a long time to come.’ But it isn’t just Financial Services that is suffering. For all services, encompassing a plethora of industries and professions from airlines, to architects, to accountants, to engineers, the costs and barriers to trade have increased by between 40-50 percent, which, Pryce predicts, is ‘an area that will require a lot of attention for the future.’

Finishing on the corroborating data from the National Institute of Economic and Social Research, which displays the impact on GDP of Free Trade Agreements after ten years compared to continued EU membership, Pryce deduces that we have ‘already lost about two or three percent of GDP by comparison to where we would have been if we had voted to stay [in the EU], mainly because of reduced business investment, which we are still suffering from’. ‘The expectation’, she continues, ‘is that after ten years we will have lost…about four percent of GDP, and we’re just not going to regain that.’ The reason for this pessimism, she explains, is that while the trade we lose with the EU will be made up with trade deals with other countries, we will lose a lot in terms of foreign direct investment as we are no longer going to be a gateway to European migration, and this is an important part of the problem. ‘Migrants as a community pay more into the exchequer than they take out’, Pryce continues, and so without them ‘we lose a lot in terms of productivity, economy of scale, and so on.’

‘Worryingly, it is expected that a lot of these predicted losses will happen within the first three years’, Pryce warns, referring partly to a recent statement from the Bank of England. Unfortunately, the reality of the situation doesn’t lend itself to an optimistic conclusion to the discussion. Instead, Pryce surmises that in the wake of Brexit and the pandemic, ‘we are going to have to face the double problem of getting the economy back to “normality” and also deal with the fallout in terms of businesses, supply chains being interrupted and the productivity issue which has been a perennial problem in the UK for a long period of time.’

Dr Adam Marshall on the Five Key Issues Affecting the Future of Business 

In the second half of the webinar Dr Adam Marshall dives into the effects of the current global situation on different sectors of individual businesses at a more micro level. In agreement with much of Pryce’s hypothesis, Marshall begins by identifying the five key issues affecting business communities right now: working capital, trade barriers, policy changes, workforce and location. ‘Starting with cash flow and working capital,’ he begins, ‘what every survey points to is that cash is the biggest single preoccupation for most of our businesses at this stage and, unfortunately, many companies across the UK are running on empty…In particular hospitality, leisure, tourism, and aviation.’ But the problem has a trickle-down effect, he says, explaining that ‘all of these industries, all of these businesses, have long and deep supply chains into their local communities, so the risk of any one of the big and well-known companies in this area is not confined to that individual company, but is spread across wide supply chains around the UK and indeed around the world.’ 

While some companies have had a relatively good pandemic in terms of the presence of money on their balance sheet, there are real fears around what might come next, and so many are planning for the rest of the year in a very conservative way. Many businesses have already gone through the cash that’s on their balance sheet and are facing some serious difficulty. ‘What this highlights is the importance of working capital, so that companies have the chance to rebuild their demand over the coming months as they reopen’, notes Marshall, ‘but then we also have an issue around growth capital, too. Lenders are going to be more risk-averse [and] government support will start to recede, so the availability of growth capital through both equity and debt is going to be hugely important to so many of our businesses.’

Back to the issue of trade barriers, Marshall touches on the many ports full of containers, which are prohibiting the function of global trade. As a result of both the pandemic and Brexit, he reiterates that there are ‘serious logistical and supply chain issues affecting a lot of companies…I think [there are] a lot more businesses now putting priority on supply chain resilience [rather than] the lowest possible cost.’ His prediction is that this conservative planning will continue over the coming years.

On the first of January, with the EU’s application of the union and customs codes to anything coming into the EU from the UK, and the Northern Ireland protocol, have created what are often referred to as ‘teething problems’ for trade, a term that Marshall views as reductive, stating that while ‘there are some adjustment issues…some of these changes are structural and will result in a lot of businesses simply not being able to access their markets.’ For example, he says, ‘we’ve seen this with Scottish seafood producers unable to get their product to continental customers in time before the food spoils.’ In a range of industries, business models are having to be reassessed because of Brexit-related trade issues. Citing a shocking statistic, Marshall reveals that ‘the cost of transporting goods to the UK from various EU destinations in recent months has been 10 to 30 percent up on what those costs were in the third quarter of last year.’ While some of that initial shock seems to be receding, he predicts that what may be left is a residual structural impact and higher long-term costs for businesses trying to move goods across borders, accentuated further by the loss of connectivity due to the pandemic. ‘What is absolutely key’, explains Marshall, ‘is the early re-establishment of trade routes for services and goods, and for air connections.’

Discussing next the policy environment for businesses, Marshall praises the abundance of support packages for businesses provided by the government, while noting that it’s important that support continues through to the end of 2021.’I liken the experiences businesses are having right now to a marathon – they’re in sight of the finish line, but once they cross it, they need a space blanket, a bottle of water and to recover from the race they’ve just run.’ Moving forward, he stipulates, ‘the Chancellor has got to come out with big incentives for future investment. The companies that have cash on their balance sheets have to be incentivised to use that money if we want to see growth in the coming years.’ But the last thing we want to see, Marshall warns, are increases to business taxes to pay for the consequences of the pandemic. ‘All of this, will have an impact not just on business operations, but also on sterling’, predicts Marshall. ‘We've seen even just in recent days, with discussions about the roadmap out of lock down, the UK's vaccine program, the expansion of testing and financial support, an interesting impact on currency, [which] we may see continue [following] a sustained re-opening and recovery.’

Marshall finishes on the impact of the past year on both people and places. Our home and work lives have effectively melded, and we’re seeing the impacts, many mental health-related, on staff and subsequently on businesses. Predicting the future of work, Marshall says, ‘We're going to end up with a hybrid working life and a hybrid working world, and we need to start having open discussions in our businesses about what that looks like and how it affects productivity and success.’ We also need to think about the decline in footfall that many of our major centres have experienced as they have been vacant for so long. This will have a profound impact on concentrations of business and economic activity, says Marshall, predicting that the impact will also be felt in towns and rural areas as we ‘reorganise economic activity and our working lives in this country.’

The Impact on Currency Markets and Future Opportunities for Businesses

Concluding with a Q&A, moneycorp’s Lee McDarby asks both speakers what they identify as the most realistic pressure points and risks surrounding supply chains in general. While Vicky Pryce’s answer touches on insurance and security for firms as they recover and restructure, Adam Marshall focuses on currency volatility. ‘While the Brexit agreement is now in place and we know what sorts of arrangements we're going to have arranged with the European Union’, he says, ‘we’ve seen already with the argument over vaccine distribution just how fragile that consensus is, and, of course, that spills over onto currency markets, which could have impacts on many importers and exporters trying to move goods across borders. So I think,’ he concludes, ‘businesses will probably be thinking a lot more about currency volatility and potential currency risk than they might have done in a more settled environment.’

In the spirit of ending a discussion of harsh realities on a more positive note, Marshall offers some optimism, predicting that the increased resilience and diversification of supply chains prompted by the past year will stand to businesses going forward, and possibly lead to more ‘home-grown solutions here in the UK.’ While acknowledging that it’s implausible to move everything onshore and pretend that we can do it all on this small island, the lesson in resilience and diversification is a valuable takeaway from the turbulent year we’ve survived. 

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