Brexit didn’t create the economic turmoil some feared, but pressure on investment clouds the UK’s longer-term economic prospects. Responses to our survey highlight the need for a robust response from companies and Government to safeguard its attractiveness.
Brexit in context
EY’s 15th Capital Confidence Barometer (CCB15) shows UK companies interpreting Brexit within a broader landscape of risk and opportunity — one they’ve been adapting to for some time.
The UK outlook shifted from “positive” to “stable” six months ago, and the Leave vote hasn’t moved the dial much. 87% of UK CCB15 respondents still saw its economy as “stable”.
The data also shows domestic political stability and currency volatility topping UK company concerns.
Labor tops concerns
Recruitment and retention consistently emerge as one of the biggest post-Brexit anxieties.
92% of UK respondents expect Brexit to affect their ability to hire skilled workers, and 69% expect problems hiring unskilled workers. Retaining unskilled workers isn’t a significant concern, but 69% worry about retaining skilled employees.
Almost a third of UK respondents expect their investment levels to fall over a fifth in the next year. And yet, almost half say previous attempts at automation were unsuccessful and 35% still duplicate manual and digital processes. There are clearly significant opportunities to improve output and efficiency, if companies are willing to invest.
Exports are vital for the UK’s growth, helped by a weaker pound.
We were surprised to see that two-thirds of respondents, when answering our survey over the summer, expected sterling to bounce back in the next two years, and just 21% expected it to fall further.
Attitudes may well have changed though, and UK companies certainly cannot be complacent.
A sterling value well below $1.30 has profound implications for importers, who could look to invest more in UK supply chains to counteract expensive imports. Many exporters will also contend with higher input prices, but the falling pound should boost opportunities abroad — especially while the UK is still part of the EU.
M&A beyond and within Brexit
The number of UK respondents looking to transact in the next year has dropped from 59% to 48% since our last CCB in May 2016 — hardly surprising in these more complex times. Nevertheless, M&A appetite remains above average, driven by strong imperatives to transact.
It’s pertinent that 40% of UK respondents are looking to acquire startups with digital technology, and 30% to acquire talent. A third see digital as their top board priority and M&A provides the surest route.
UK sectors most likely to acquire
- Consumer products and retail
- Real estate
- Diversified industrial products
And could Brexit inspire M&A activity? We expect further portfolio and strategy adjustments. The low-yield environment will also encourage pension funds to acquire and create forced sellers among those with pension deficits.
Private equity also remains active. Above all, M&A still provides one of the best routes to growth. Financing — for companies that can access it — remains cheap.
UK attractiveness in doubt
The weak pound provides an incentive for overseas buyers, but the UK’s attractiveness has taken a hit.
CCB15 shows it falling out of the top five investment destinations for the first time in seven years. However, 62% of companies are still positive about their UK operations, but smaller inflows into new and existing operations are concerning in light of falling domestic investment and the UK’s negative current account.The most positive responses come from India, Russia and Europe, but there is negative sentiment from countries who previously favored the UK as a gateway into Europe, including 82% of Japanese respondents, 56% from the US and 53% from China.
Time to act
Markets have been in a state of flux since the end of summer as they come to grips with Brexit and worries elsewhere. Companies must stay flexible and agile, and constantly review their operations and portfolio.
CCB15 also highlights the size of the Government’s task as it starts to reposition the UK.It must reassure overseas investors and set out clear trade priorities with favored nations. Our UK respondents clearly want to prioritize trade deals that revitalize old relationships. It also can’t ignore the opportunity closer to home, using technology and improved digital skills to boost the UK’s productivity and attractiveness.
EY UK&I Leader
Transaction Advisory Services
+44 (0)20 7951 4757
Download UK highlights (PDF) Press release: UK attractiveness as an M&A destination slips