Blog post

CEOs realise Brexit will be a slowmo skyfall

By Mark Raskino | July 04, 2016 | 0 Comments

Brexit is fairly drastic economic and political surgery. In the long term it might be good for UK business. In the mid-term, it will hurt.

Gartner is not an economic forecasting house. Our goal is to provide the technology-related insight necessary for our clients to make the right decisions, every day.  But of course to do that well we must make assessments of how broader macro environment factors will impinge on the world of technology. For example Gartner’s teams of analysts who measure the technology provider markets, create forecasts of expenditure in many technology categories. Our chief forecaster John Lovelock integrates their models and develops global tech industry forecasts. You can read about John’s initial post-brexit assessment on Smarter with Gartner.

Those of us who provide advisory research for business and technology executives outside the IT industry itself, must act as scenario thinkers to understand how the application of technology might change inside those corporations. We need to understand the stresses and strains a macroeconomic shock event might place on organisations, how it might deflect current business strategies and how that will impact on those leaders who were planning to apply technology enabled change in various ways to achieve particular business outcomes. Thinking through the cascading chain of events and the most probable scenarios ahead can often give us lead time to think and to plan.

So how will Brexit impact the internal corporate use of IT and those involved with it?  The answers will be complex and we will work through them with our clients over coming months – and years. Our initial advisory research notes to clients are here and here. However one thing is very clear to me. The impacts will unfold relatively slowly – and that in itself is an important thing to think about. There will be relatively few short term, sudden severe impacts. Because of that, over the next few months leaders might be tempted into thinking that it was all a bit of a fuss about nothing. That the sky isn’t falling. I think that would be a big mistake.

I live in the vicinity to Heathrow where the line of big longhaul aircraft  – 747s and A380s coming into land is a regular sight. The bigger they are, the slower they seem to move. From some angles it seems as if they are almost hanging in the sky and will never come down. Its an illusion of scale. Brexit is a bit like that. Yes indeed, to some extent the economic sky is actual falling, but its falling slowly.  Here’s why.

The next UK prime minister probably won’t be in office before September. She or he will have to assemble a team and agree an approximate strategy before invoking article 50 that triggers formal exit negotiations with the EU. Those negotiations could take up to 2 years. If we are lucky they might take only 6 months but very few people would be so optimistic. Whichever way you look at it, business leaders involved with UK trade, inside or outside the 5th largest economy in the world – face massive uncertainty for at least a year and very probably a lot longer. Uncertainty is the enemy of decision making and investment.  In many cases, CEOs won’t be able to know the terms of trade, the tax rates applicable or even some of the laws under which business operations might be conducted. Acting in good faith towards their investors, they will probably have to sit on their hands – just as they did for a couple of years after the banking crisis. Do nothing, wait and see will become the new default setting for many kinds of corporate investment projects. The combination of unknown unknowns will probably get worse – during the exit negotiations – before it gets better.  After all, the UK is placing 40 years of complex negotiated regulation on the table for reconsideration – everything from distance selling to data privacy to patent protection could be up for change.

If you doubt there are hard business impacts, I can tell you that already in the last week I have spoken with contacts in the UK who have told me about falling online sales, hiring freezes, M&A project cancellations (some in mid flight), and recently agreed cross border contracts with Brexit break clauses written into them, that are now imperiled. If you want to hear, in their own voices, how some UK CEOs reacted to Brexit over the first week – I recommend this edition of the excellent BBC business interview program ‘The Bottom Line

That’s just the short term direct UK impact. There is also a risk of secondary political impacts in other countries as politicians and populations weigh up the precedent that the UK has set – and either decide to harden their stance against similar effects, or to emulate some version of the separatist the idea.  There could be a significant anti-globalisation, localism and protectionism trends as a result. We just don’t know how far those might extend. We do know it will take many months or some years to unfold. Unlike a banking confidence crisis, international popular political contagion tends to move more slowly and corrosively. Like rust rather than like dominoes.

So yes Brexit was a Lehman moment. This time we knew when and where it would come. It could have turned out to be a Y2K ‘false alarm’ – but it wasn’t. We had time to brace ourselves a bit better, but that didn’t stop it happening.  Just like the banking crisis, the effects will run deep and they will run on for years.

After they place big decisions on ice, I think many UK business leaders will ‘head off to the beach’ for the summer. There’s not much positive action to take yet. They know there will be a huge amount of work ahead to reset strategies and reorganize companies – so best rest and recharge now.  They know that work can’t really commence until the politicians get their act together and start at least sketching out what a post-brexit landscape will look like. CIOs and other business executives with significant UK business technology-related project plans should expect strategy change impact to start from this Autumn. Expect a difficult budget planning season.  Sadly I fear, the economic sky is indeed falling – but this time its in slow motion.

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