One of the consistent messages post-Brexit is the call for calm and considered management action rather than any knee-jerk response. We’d echo that – if nothing else because there’s no clear data yet on which to base any other decision! But we argue that previous employment lessons will help managers plan Brexit.
Overall, the Pound is down something like 8% against the Euro and Dollar. Share values around the World have dropped something like 5%. These are rough figures and the situation fluctuates and deteriorates daily.
When the Pound drops, it triggers the Bank of England to reduce interest rates and release funds with relaxed conditions to encourage firms to borrow (to spend on investment projects). Borrowing for investment generally means hiring more people. But lower share value means company values drop and banks are less inclined to lend against a reduced balance sheet. On the other hand, a reduced value of the Pound makes exports more attractive, but anyone buying goods and services from the EU will pay relatively more. Like those interviewed by the BBC, they will have to put up prices or take the hit on their margins. Typically managers respond to lower profits with cost reduction and in most firms, labour is a sizeable percentage of costs. Labour costs, and hence employment levels, is where many managers focus.
Overall, it’s a mixed bag of outcomes in which some firms will suffer and others flourish. You never know – Brexit may even be good for the UK.
Whilst mangers should not panic, it makes sense for them to consider options. There are rumblings of the issues to come: some firms have, just a week after the Referendum, put a block on all recruitment; others have started to shed contractors while more have stopped projects or announced that they won’t start any further improvement investment. Managers in many firms are hesitating until they have more clarity on what our future relationship will be with the EU and what exactly Brexit means.
Those actions are all about a lack of confidence rather than any specific response to events.
Spend or save
Improvement comes from innovation – from hiring staff to create technology. Generally, managers have two options – they can spend and therefore invest their shareholders’ funds, buying technology that will enable greater profits tomorrow. Alternatively, they can sit on the cash, keeping their reserves for an even-more rainy-day. For growth, managers must spend. If managers are confident about making profits tomorrow, they’ll spend. If they don’t have confidence in future profits, they’ll stick.
Confident managers spend, worried managers sit on cash and are disinclined to borrow.
To learn from the way things have worked in the past, it’s worth looking back at two previous economic upsets.
In the period 1999 to 2001, the UK economy was boosted significantly by events in the United States. In the US, there was huge optimism and a stock market that was, in hindsight, overvalued. The money that this created in the US economic system poured over to Europe. Europe for its part had just introduced the Euro in some countries and was benefitting from heightened unity.
Tech was considered the place to invest. In this period, the ‘technology bubble’ inflated rapidly. Tech companies in the UK expanded to consume US money. New technologies flooded Europe as managers sought improved IT systems and high speed Internet access. And the UK was ideally placed as a tech leader, dispatching project teams across Europe.
Demand for engineers and technician-level staff hugely outstripped supply. Anyone who could take instruction and do telecom-related technical tasks was hired at daily rates in the range £550-900. Companies doubled in turnover annually.
Then came a sudden shock, not unlike the Brexit Referendum result. Over-valuation scandals rocked the US, the most famous of which was Enron. Concern over bad lending swept the banks and the enthusiasm for borrowing receded. Recession followed. Overnight the money flow stopped. In the UK and Europe projects were cancelled, contractors dismissed, hiring stopped and permanent staff dismissed.
Like the author, those MDs who had ridden the wave now readjusted their firms for a more sober existence. While the US and many EU countries slid into deep recession, overall the UK suffered less.
The lesson here for 2016 is that market shocks can have massive effects, even if they don’t actually drive a country into recession. They brutally dent confidence. The banking sector in the UK has expanded hugely in recent years with demand for software engineers outstripping supply. There are parallels here with telecoms in 2001. Salaries are over-inflated and contractor rates well above the norm. Banking may suffer more than others from Brexit and it’s here that the early tremors of Brexit are being felt.
In 2008, the situation was wholly different. That recession affected all countries and was triggered in 2007 by a US banking crisis. That crisis stemmed in part from re-assessment of over-valued US sub-prime mortgages. In the UK, the recession ended soon after the Government launched a bank rescue plan.
As the two-year recession progressed, firms simply didn’t replace leavers. Firms were already critically staffed following a period of modest pre-recession growth. There was a realisation that cuts would affect capability and hence costs were managed and lower profits accepted.
The story here is that in a slow-moving recession where firms are already critically manned, managers are disinclined to cut below levels affecting productivity. They sit out the period of reduced economic activity by constraining investment.
So as we face the post-Referendum period the future is unclear. Because managers are taking time to assess future risks to profits, nothing is likely to happen overnight. There are indications that firms will re-locate over the coming two to five years. And if the UK must first leave the EU before getting a trade agreement with the bloc, we will see tariffs introduced after the two-year leave period. Tariffs will reduce trade between UK and its EU customers. And if the Pound stays weak, import prices will rise whilst exports will drop and be more attractive.
Previous employment lessons will help managers plan Brexit
Overall, what seems on the cards is a two-part reaction.
First, firms will take a 2001-approach, stopping recruitment, putting projects on hold and dismissing all investment-oriented staff. There’s some early indication that this has started. They’ll re-trench to a defensive position awaiting data on which to base future projections.
Second, firms will take a 2008-approach to manage the longer term as the UK moves from an EU orientation to a more independent position. Political commentators expect this process to last anything from two to seven years. Managers will likely assess their current capability and work only to retain that. We can therefore expect a period of low employment with only those with scarce skills changing jobs.
Our view therefore is that the private sector in the UK will see a dramatic reduction in recruitment and in employment in general over the coming two years as confidence reduces, followed by a flat period of three years as firms learn to exist with less. Slow growth in employment will then ensue once the realities of life after Brexit dawn.
Investment is essential for the future and employment will rise again. Whether it rises to pre-Brexit levels remains in the hands of politicians in the UK and EU.
Our view is that previous employment lessons will help managers plan Brexit. What’s yours? Leave a comment and share alternative arguments.