Rising staff costs main risk for business services sector post-Brexit

While higher staffing costs are likely to be the biggest challenge for Europe’s rated business services sector post-Brexit, the sheer diversity of the sector, which includes facilities management firms, travel services, staffing companies and private education, will make it relatively resistant to any fallout, Moody’s Investors Service said in a new report.

“Pressure on staff costs is likely to increase if stricter controls on migration are introduced, but our initial view is that, overall, the geographic and market diversity of business services companies is likely to make the sector relatively resilient to the effects by Brexit,” Martin Hallmark, author of the report.

The impact across the different subsectors will vary. The facilities management outsourcing sector is one of the more resilient, with high levels of diversity and activities deeply integrated with customers’ operations. It has also managed to maintain or improve margins during a period of wage inflation and falling unemployment rates in the UK.

The travel services sector is more vulnerable to changes in consumer demand, with high fixed costs and relatively low margins, and could be affected in the near term by a weakening in UK consumer confidence.

The private tertiary education sector relies on demand from students outside the UK and faces risks from any tightening of migration controls, as this could hit their ability to attract international students and teaching staff. However, sterling weakness makes UK education more competitive.

The staffing sector could be at risk from reductions in hiring and is relatively highly exposed to the changes in economic activity. Less diverse staffing companies with high UK concentration in vulnerable sectors such as financial services, construction and oil and gas are likely to be hit hardest.

The UK leaving the EU is less of a threat to the services sector (non-financial corporates and excluding financial services) because membership does not provide an integrated EU trade in services. While there are generally no tariffs, there are significant technical barriers to trade in the form of varying local regulations.

The steep decline in sterling since the UK decided to leave the EU is likely to have a relatively limited effect on the creditworthiness of business services companies.

Many will see some increase in leverage although Moody’s does not expect this to be substantial in most cases.