UK business confidence hit by cluster of Brexit uncertainties

04 December 2018 Consultancy.uk

Chief Financial Officers (CFOs) at UK companies remain wary ahead of the finalisation of Brexit in 2019. As the end-game approached, a new survey of British CFOs shows their confidence in business outcomes is languishing at a net of -30%, the lowest level since the aftermath of the initial referendum result.

The effect of Brexit negotiations – which continue under a cloud of uncertainty in the face of cabinet and parliamentary negotiations – have more than made their mark on the business community. As a result, CFOs face a gruelling few months, as many attempt to figure out the conundrum of an antidote to Brexit uncertainty before the UK formally secedes from the EU.

While the uncertainty of Brexit works both ways, occasionally leading to optimistic forecasts on the part of business leaders during the two-year negotiation window, at the end of it all, the sentiment seems to have firmly settled in the realm of pessimism. Earlier in the year, Deloitte reported on the dimming CFO optimism across the UK, with falling expectations for company performance, and heightened risk aversion. Now, the latest analysis from the Big Four firm has found that business leaders feel incredibly uneasy about their UK operations going forward.

Business confidence

To that end, CFO confidence in the latest survey has slipped to a net -30%. This represents a low point since the referendum result in 2016, when confidence plummeted to -70%. While overall, businesses are wary of a coming storm, Deloitte also noted that some industries are facing more considerable headwinds than others. High-street stores in particular have seen the number of closures increase drastically over the past year.

Retail sector struggling

Of this, non-food retail has been the hardest hit segment – at a -2,200 contraction in H1 2018, up considerably from -665 in H1 2017. The convenience segment saw around 500 closures in H1 2018, while leisure saw declines in excess of 1,000. In total there was a net closure of 4,400 stores in the first half of 2018, well above the small total number of net opens in 2017 (103) and the large hit the industry took in 2016 (2000 net closures).

Net loss of high-street stores grows in H1 2018

One of the trends affecting high-street retailers is an increased shift to online sales channels, which has begun to impact their footfalls – yet growth even on high street was relatively positive, at 2.2%, although online sales were far more significant in terms of growth at more than 15%. Online retail represented the lion’s share of total growth for the period, at 53% of the £9.6 billion in revenue growth. Online spending now represents more than 18% of total sales in the UK.

The pain for retailers may not be over yet – the study found that consumers are looking to rein in their spending. A net -6% say that they will decrease their holiday spend, while almost 10% said that would cut back on electronics equipment spend in the latest survey. Retailers and providers of entertainment are likely to see footfalls decrease even further – with 10% of respondents saying that they will reduce their spending on clothing and footwear, with a similar figure for furniture and home-ware spending.

Planned spending on discretionary items set to decline

The biggest decline is in restaurant and hotel spending, at around -12% net, up from -4% in the previous quarter. Going out is set to be the hardest hit, with a net -12.5% of respondents planning change their spending habits, up from -5% in the previous quarter.

Commenting on the results, Deloitte Chief Economist Ian Stewart, said, “For business and consumers the risks of an abrupt and disruptive exit from the EU loom increasingly large. The implication is that a deal that secured an orderly exit could help bolster confidence across the economy.”

Related: Despite sunshine, tough trading conditions persist for UK retail.

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Brexit will have major impact on UK-EU electricity flows

22 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”