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What does Brexit mean for the channel?

With the dust refusing to settle on last week’s shock referendum result, what does it all mean for channel organisations with pan-European operations?

A wise little green chap once said that fear is the path of the dark side. The UK’s decision to leave the EU has injected enough fear and uncertainty into the market to keep the Sith Lords in business for centuries to come; but what does it all mean for the IT industry? IT leaders could be forgiven for not having a contingency plan in place given that the result blindsided even the most astute market watchers. How will the pending changes in the financial and political landscapes impact IT organisations, vendors, partnerships and purchases over the coming months and years?

John-David Lovelock, research VP at Gartner believes that IT investments will suffer, in the short term at least, and the negative effects will spread into Western Europe.

“In the wake of the UK’s exit from the EU, some new larger, long-term strategic projects will now be put on pause and likely not restarted until 2017 when the outlook with the UK outside the EU becomes clearer,” he said.

Gartner places the current forecast growth for UK IT spending at 1.7%. However, the analyst powerhouse believes that the impending Brexit will force growth to fall by 2-5%. “In other words, UK IT spending growth will certainly be negative in 2016,” Lovelock said. “UK IT spending growth will certainly be negative in 2016.”

“The time to recover from the drop in the pound that occurred last year was expected to be short with a recovery to 2015 levels by 1Q17,” Lovelock said.

Canalys foresees an even gloomier picture in coming months. The crystal-ball-gazers believe that IT spending in the UK will be ‘hit hard’ due to uncertainty, with a decline of up to 10% in 2016.

“Unemployment and inflation in the UK are low, and the economic outlook was positive. The decision to leave changes this outlook, resulting in a range of short- and longer-term implications, the extent of which will be unclear for months, if not years,” said Matthew Ball, principal analyst. “Canalys’ IT spending forecast, based on the UK remaining in the EU, was in the range of $90bn (£66.8bn) to $100bn in the UK. Canalys now expects this to fall by up to 10% in 2016, based on the public sector and businesses cutting expenditure to reduce risk.”

“The outlook for 2017 could be even worse, with up to a 15% decline as IT budgets are set lower on the prediction of a tough year ahead and ongoing uncertainty,” he added.

Of course, the most immediate impact to be felt will likely come from the fluctuating pound. Concern is growing that dollar-denominated IT products and services will increase in price as vendors look to protect their margins.

Canalys believes that sterling could feasibly drop below the $1.20 mark if confidence deteriorates further and capital continues to flow to safer assets. “This will be a key issue for the IT sector, as technology prices rise due to higher import costs,” said Matthew Ball, principal analyst. “In the short term, contracts will have to be renegotiated and proposals requoted due to the strong shift in value. Any new activity will be suspended until rates stabilize,” he added.

Nik Churchley, EMEA channel director at FireEye believes that vendors and distributors need to stand up to the currency headwinds. 

“When it comes to pricing, my view is that distributors will hold dollars in advance to protect themselves from fluctuations like this. I think there will be some pricing pressure which may cause vendors' pricing to increase, but this is very much something that the markets will get used to. We don’t expect customers to buy at a higher price if the pound/euro is stronger against the dollar so we just need to hold our ground.”

Gartner says that vendors should do their best to quell uncertainty by crafting ‘messages of hope’. “Maintain your current practices and ongoing strategies,” Lovelock suggested. “The UK has embarked on a process to change, but that change is yet to be defined.”

Vendors are quickly adopting this ‘keep calm and carry on’ mantra.

Barrie Desmond, COO, Exclusive Group told MicroScope that while Brexit presented undeniable obstacles to European trading, he was confident that his organisation could circumnavigate them.

"There is no doubt there will be costs added to doing business in Europe. It is going to throw up some challenges and there is some uncertainty and speculation, the market doesn't really like that, but I think we can manage,” Desmond said. “I do not think Brexit will stop us in doing anything. I have business in Switzerland that is growing, and in Norway. Those are countries that can still trade in equal terms with the rest of Europe and be part of the economic environment.”

Gartner also suggests that IT organisations with a vested interest in Europe create what it calls an “Office of Brexit”, in order to watch for legislative changes and assert influence where possible.

‘Trade disruption, political instability, recession, stagflation, talent pool reduction and the collapse of the EU are all potential outcomes that need consideration,’ concluded research analyst, Claudio Stahnke of Canalys. “The UK is taking a big gamble on its future. The unprecedented nature of the move to leave makes the true extent of the outcome an unknown. Though there are a number of different scenarios that could play out, what is certain is that we are only at the very start of defining the UK’s new relationship with the EU.”

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