2022 is already bringing new challenges for the UK– acute political and economic uncertainty at home and abroad, turbulence in government, inflation and tax rises, Covid and its aftermath, disrupted supply chains and new regulatory frameworks.
We asked Flint’s Specialist Partners to give us their take, from their different perspectives, on what the year has in store for businesses and investors.
Pandemic to endemic - 2022 is the year when the Government will shift policy after two years of Covid caution. But we will not return to what we had before, as governments, firms and individuals plot a new course. Businesses will have a small window to input views on what the “new normal” should look like for key policy, regulatory and public health decisions.
Workplace and workforce change – Covid-19 has changed the workplace as we knew it. The challenge will be determining whether Covid-induced shifts in behaviour are transient or permanent, and the impact this will have on our economic geography and investment decisions. Tight labour markets and rules on immigration will boost the power of job candidates to set their terms on flexibility, benefits and pay. This offers an opportunity for thought leaders to set out views on the future of the UK workplace, and for companies with defensive interests to have their say.
Buyout Britain – UK assets remain attractive to global capital looking for returns. Will this trend continue, or will it be affected by shifts in policy such as the National Security and Investment Bill and regulatory changes? Will supply chains still be upended by global logistical challenges, Brexit-related barriers, price spikes and materials shortages? And what will further transactions mean for supply chains and business relationships? This will be a significant year for UK investors and firms, as both buyers and sellers consider whether the time is right to pursue transformative deals.
Business Purpose – Corporates will be under more pressure to explain their societal purpose to retain or enhance their licence to operate with customers, suppliers, and regulators. Adair Turner’s arguments on the ‘social utility’ of businesses, first aired over a decade ago, are now getting a much wider airing beyond just the Financial Services sector. Companies will come under pressure, from investors and the wider public, to be clear about why they do what they do – and to set ESG policies to match.
Boris Johnson is in the most difficult crisis of his premiership. He will remain at risk, with the Sue Gray and police inquiries into No10 lockdown parties, the cost-of-living crisis, pressure to make a reality of the levelling up agenda and the May local elections. The search is on for a new team to staff No 10, but few are keen to take the gamble and current talk of significant change appears overblown.
The Cabinet, collectively and individually, find themselves in a much stronger position. With the centre of government weakened by internal disruption and reorganisation (at best), individual Whitehall departments will take more initiative, and Secretaries of State will feel able to push back against the Policy Unit or even the Prime Minister. In the short term at least, No10 will have less bandwidth to engage on all, but the most important issues and decisions are likely to take a lot longer. I would also expect more ‘leaks’ from those hoping to succeed the Prime Minister, as they seek to create distance from the current operation.
Instability is likely to have a knock-on effect on legislation. Of the 30 Bills announced in the Queen’s speech last year, 24 are still progressing through Parliament. The Government faces a significant backlog at the end of the session, and conflict with the House of Lords on the final form of Bills. With unrest among Conservative backbenchers, the Government will wish to avoid rebellions, and is more likely than before to concede on amendments. There is also uncertainty on which bills should be included in the next session. If a leadership challenge materialises in February, it is likely the Queen’s Speech will be delayed from May until early July, or September.
Inflation - Although we anticipate further energy price rises and higher labour costs arising from the National Insurance increase, inflation is already surging ahead, especially on the supply side. Ministers will be under pressure to find a solution and we cannot rule out more taxation. On the demand side the labour market is squeezed very tight as the workforce is reduced, and we can also see the effects of Covid and supply chain issues in contributing to inflationary pressures.
Net Zero - Last year’s Net Zero Strategy provided an outline for the Government’s ambition to reach net zero emissions by 2050, but the final shape of a plan is not clear, while the economic pressure is rising. On ESG and reporting requirements, 2022 will see businesses struggling on how to measure social impact in the face of higher demand for clarity and guidance. A series of policy consultations will flow over the next 6-12 months, offering the opportunity to engage with Government to help shape the debate.
Regulatory burden: Although the Government wants to show a Brexit dividend to offset costs to business, many companies face increasing burdens on their operations. Some are in response to shifts in public and investor opinion, like proportionate requirements on ESG reporting, health and safety and inclusivity. Currently many of these rules principally affect public companies, but there will be an increasing onus on the Government for action as demands are made upon privately held businesses as well.
Innovation - Business Secretary Kwasi Kwarteng sees the Innovation Strategy as central to his mission at BEIS, and this year offers an opportunity for businesses and investors to work with government to drive implementation forward. To help that, there are important reviews into research bureaucracy and the landscape of institutions, such as the recently published Tickell Review and the forthcoming Nurse Review.
UK public R&D spending in cash terms will rise by £5bn over the next 3 years (from £14.8bn) and Innovate UK is budgeted to get a 60% increase (from £700m). Despite the departure of Dominic Cummings, with his focus in this area, the government wants to seize opportunities to shape the economy post-Brexit, which should create quite a fertile environment for R&D focussed companies. The Government needs businesses to supply cutting edge policymaking ideas and help turn high-level objects like “using innovation to boost the economy” into deliverable projects. It needs organisations that can assemble the counterparties, provide private sector finance, and communicate the value of what the Government is doing.
The Union and constitutional issues will remain high-profile in British politics. While this may not lead to immediate upheaval for businesses, it will require understanding of ongoing uncertainty, not least for future investment decisions. Points to watch:
The UK Government will want a Brexit regulatory differential which begins to change the shape of the British regulatory state. The recent ‘Benefits of Brexit’ paper illustrates how far this agenda still has to go. It is likely to cause friction with devolved governments, who will assert their right to regulate within devolved powers.
The international picture is concerning. Tensions between Russia and the West are dangerously high over Ukraine. President Biden faces difficult midterm elections. It is a big year for China as President Xi seeks a third term. The challenges of climate change and vaccine policy are daunting. The UK Government will seek to play a role in these matters and should be open to inputs. The international context for business requires ongoing attention.
The National Security and Investment Act affecting international investment in the UK came into force in January, which is an important development giving the UK Government new powers of scrutiny in this space, something businesses will need to factor into due diligence.
On digital trade and cyber following Brexit, the Government wants the UK to be a global leader in developing liberal digital trade, for example by being more permissive than the EU on cross-border data flows and preventing forced localisation of data. The UK has an opportunity to take a lead on new approaches to adequacy agreements with third parties and championing free data flows in multilateral fora. Technology resilience and cyber security and standards will feature heavily as the Government implements the National Cyber Strategy.
As ministers face pressure to ease rising inflation and cost-of-living, regulators will need to be seen to act boldly to push prices down. Yet necessary investment in water, energy and transport infrastructure needs to continue to rise to meet objectives like net zero, climate change and resilience. Infrastructure companies are meanwhile plumbing new depths of unpopularity due to pollution and power cuts, and a weakened Government may be less supportive than usual.
The outcome is likely to be an ‘easy squeeze’ on returns from regulatory decisions made in the next couple of years (notably the 2024 water price controls paving the way for other sectors). The argument that ‘investors won’t live with it’ is less credible in light of the significant premia placed on recently traded assets. Due to the long timescale of regulatory decisions, this could have a longer-term depressive effect on returns in regulated infrastructure sectors.
Digital regulation and new regulatory frameworks are on the agenda, with significant legislative changes underway - in Brussels, the Digital Markets Act and in the UK, the government consulting on proposals for a pro-competition regime. This will be challenging for both regulators and regulated businesses. Regulators will need to balance having the necessary powers to enforce rules to address new technological challenges with making sure they are held accountable; businesses will seek to ensure that new regulations do not damage their business models and innovation.
In the UK key considerations include the Online Safety Bill, changes at the top of both the CMA and Ofcom, digital regulation as a test case for whether the UK diverges from the EU, and regulation generating potential stress in the UK’s relationship with the US.
In the EU the power struggle between the European Commission and Member States will present significant political challenges for the future of national competition authorities.
If you would like to discuss any of these issues further, please do get in touch with us.