British companies absorb Brexit shock, get on with business for 2017

EghtesadOnline: Richard Bunce says he felt sick when voters decided to take Britain out of the European Union in June, forcing him into a emergency review of his firm's expansion plans.

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18 December 2016

But six months on, orders are strong and a new growth plan is in place, according to Bunce, managing director of Mec Com Ltd which sells devices to protect against power surges to clients such as Siemens and Alstom.

Far from the "profound and immediate economic shock" predicted by Britain's finance ministry in the event of a vote for Brexit, the economy has, so far, barely slowed, according to Reuters.

Bunce expects tougher times. But like many other executives trying to push their Brexit worries to one side, he invested - nearly half a million pounds on a new laser-cutting machine over the summer.

Now he plans to spend another 750,000 pounds ($932,000) on robotic metal-working equipment at Mec Com's plant near Stafford, a town 135 miles (217 km) northwest of London, after landing a big contract with a British food processing firm.

"We believe that the opportunities we have got will, one way or another, find a way around Brexit," Bunce said.

To be sure, what Brexit means is far from clear. Britain is due to begin its two-year divorce process with the EU early next year. Agreeing its new relationship could take a lot longer.

Bunce is taking precautions in case his firm ends up facing tariffs on its exports to the EU. He recently traveled to Romania to discuss the possibility of expanding his company's existing unit there in the event of a "hard" Brexit.

"If that happens then we would need to find a way to switch very quickly, but as things stand we are planning for more UK business," he said.

INVESTMENTS PLANNED

Many other companies seem to be taking a similar approach, including technology giants Facebook and Google which have announced plans to create jobs in Britain in recent weeks.

According to official data, businesses increased investment in the three months after the referendum.

Manufacturing body EEF says the sector is its most upbeat in a year and a half, helped by an export-boosting fall in the pound since the vote, and investment and hiring plans are up.

In construction, office building has slowed but some companies plan to ramp up home-building next year. A survey by IHS Markit showed growth in the construction sector hit an eight-month high in November.

Economists are now raising their predictions for British economic growth next year, after many of them initially warned June's vote would quickly cause a recession.

The Bank of England in November made its biggest ever growth upgrade, saying the economy would grow by 1.4 percent in 2017, up from a forecast of 0.8 percent it made three months earlier.

Some investors think that even this looks too cautious.

Percival Stanion, head of multi-asset funds at investment firm Pictet, predicted growth of nearly 2 percent in 2017.

"The expectations of a collapse in the UK were massively over-pessimistic," Stanion said, blaming the pro-EU views of many economists for skewing their forecasts.

He said supermarkets and other retailers would probably absorb much of the inflationary hit caused by the fall in the value of the pound, rather than pass it on to customers.

LONG-TERM UNCERTAINTY

For now the BoE - which is helping the economy with its massive stimulus program - is waiting to see who is right: the pessimistic investors who have pushed down the value of the pound by 13 percent since June or the country's consumers who have carried on spending.

Gertjan Vlieghe, one of the BoE's interest-rate setters, said he believed Britain was set for a "slow-motion" slowdown.

But the drag could be softer if there is progress toward a good Brexit deal for Britain, which would push up the value of sterling and ease the inflation hit, he said last month.

Sterling's rise over the past month could also soften the rise of inflation.

Looking further ahead, the impact of Brexit is harder to quantify without no clarity on what it might mean for exports, investment and migration in coming decades.

"You can easily see what the negatives are but they are in the medium term rather than the immediate one or two-year timeframe," Stanion said.

For now, companies are trying to get on with day-to-day operations as best they can.

The British unit of German car seat maker Brose announced a 10 million-pound investment on Dec. 13 in a new paint facility at its plant in the central city of Coventry which supplies clients such as Jaguar Land Rover.

Juergen Zahl, managing director of Brose UK, said there were question marks about whether carmakers in Britain might end up shifting production to other countries in the EU in the event of a Brexit deal that leaves the sector facing high trade tariffs.

But Japanese carmaker Nissan's decision in October to build more cars in Britain was a positive sign, he said.

"For us at the moment, other than this long-term uncertainty that we have, it's pretty much business as usual," Zahl said.