What Does ‘Hard’ Brexit Mean For UK Technology Sector?

Brexit

Following the Prime Minister’s clarification on the UK’s likely post-Brexit relationship with the EU, Britain’s technology sector will be looking to determine what the future holds outside the Single Market.

The EU referendum caused a lot of market uncertainty for many UK technology companies which have had to continue advancing in the aftermath, not knowing the long-term effect that issues such as access to European talent and Britain’s status within the Digital Single Market will be resolved. The downward spiral of the Pound has also been a significant focus for those who export or import into the EU and other key international markets.

According to think tank Tech City’s latest research, there are around 58,000 digital technology businesses in the UK. This lucrative sector plays an important part in driving UK economic growth. The digital tech industry, for example, had a massive £161bn turnover in 2014 and managed to grow 32 per cent faster than the rest of the UK economy.

Venture capital seems to have no bounds either – £2.9bn was raised by British technology firms in 2015 according to CB Insights and London & Partners, a 70 per cent increase from the previous year.

Dow Jones Venture Source’s July 2016 findings also revealed that the UK was able to keep its title of top destination for investments. The closure of 115 deals by July suggested that a lot of investors weren’t altering their strategies based on Brexit. London & Partners noted that in 2016, investors backed UK companies with £6.7bn and drew more investment than any other European country – over a third of the money went to businesses in London.

It’s not all rosy however. Confidence in the UK technology sector is low. Research by Tech City found 74 per cent of companies believed the business environment would worsen in 2017. Cosmopolitan European tech hubs like Berlin, Amsterdam, Lisbon and Dublin will be watching that space, hoping to lure British jobs.

While the British economy has remained resilient in the face of Brexit, performing far better than many pundits had predicted post-referendum, one of the key problems for the technology sector may yet be round the corner if and when we see an end to free movement of EU talent into the UK.

With a reported 20 per cent of digital businesses believing that EU countries hold top individuals they’d like to hire, will London and the rest of the UK still be attractive enough to lure the best talent if access barriers are put in place?

One positive is that London’s status as an international technology centre is currently looking secure.  A number of US tech giants have recently announced their plans for UK expansion with Google, Amazon, IBM and FaceBook among those planning significant investment here. Industry giant Snapchat’s parent company, Snap, has also announced that the UK will be home to its international headquarters. The multi-billion-dollar firm is expected to go public this year.

While all this bodes well for the future of the UK technology sector, it could be somewhat mitigated with the UK left out of the European Single Digital Market, a concept designed to break down barriers and regulatory walls, moving 28 national markets to just a single one. This initiative will make it easier to operate across borders and fears that the UK may now be excluded from it means that some business start-ups could jump ship and head elsewhere. If that is what develops, the UK sector will need to leverage its strong e-commerce background to maximise opportunities in the domestic sales.

Returning to the latest Tech City poll, it does indicate a more positive sense about the longer term. Only 24 per cent of businesses expect things to go south post-Brexit, against nearly three quarters which are optimistic for the future when the UK has left the EU. London’s digital community has also enjoyed an upswing in positivity with 35 per cent of businesses now expecting to see some improvement in the year ahead, as opposed to only six per cent in a poll conducted after June’s Brexit vote.

In the interim period, any UK technology businesses that deal in foreign currencies will need to manage their assets strategically to limit the impact of forthcoming Brexit negotiations where we can expect further fluctuations in the Pound. After the post-referendum crash, Sterling remains subdued. With many political debates over Article 50 set to follow, technology businesses can expect to see plenty more volatility in 2017.

Greg Smith

Greg Smith is Head of Trading at London-based foreign exchange specialists Global Reach Partners.