‘Brexit means Brexit’ is the battle cry from Prime Minister May, but what does this really mean? The decision by the British people in the 23 June referendum to leave the European Union (EU) was a watershed in the country’s history and a moment of true change.
The long-term implications of the vote are difficult to assess—especially given that the Article 50 ‘firing gun’ hasn’t even been triggered. However, we can begin to make certain assumptions. And the opinion expressed in a new Dun & Bradstreet Brexit Briefing Report is this: the long-term economic impact of Brexit on the UK itself will be significant and negative, while demand and supply shocks to the rest of the EU are likely to be milder.
The article picks out five areas where the repercussions of Brexit could be immense. Let’s consider each in order.
1. Potentially serious political fallout
The article indicates that Brexit risks delivering a serious political blow to the ‘EU project’ by paving the way for similar referendums in other member states (although June’s general election in Spain suggested that this need not necessarily be the case). Indeed, with the anti-establishment Podemos party losing more than one million votes to the mainstream PSOE party since December’s inconclusive elections, the Spanish ballot shows that in times of uncertainty voters may turn to mainstream parties which they perceive to be safer. Accordingly, the Brexit vote could lead to a stabilisation of the European political landscape rather than trigger further fragmentation.
2. Trade and currency impact more positive
The impact of the trade and currency channel is, according to Dun & Bradstreet, limited and positive. Indeed, the EU only sends around 6% of its total merchandise exports to the UK. As for the euro zone, Dun & Bradstreet expects the British pound to depreciate against the single currency less than it will depreciate against other major currencies like the US dollar and Japanese yen, given that the euro itself is likely to be weaker as a result of the Brexit uncertainty. It follows that the drop in EU exports to the UK is likely to be more than offset by an increase in EU exports to the rest of the world (due to a cheaper single currency).
3. Confidence expected to drop
The Brexit Briefing Report suggests a possible loss of confidence in the European economy and the potential for an unravelling of the project of European integration, which has ceased to be perceived as everlasting. A prolonged period of uncertainty and market volatility is set to weigh on companies’ investment decisions, and thus on GDP growth.
4. Widespread commercial implications
The Brexit vote has led to a depreciation of the euro against the dollar and other major currencies, increasing the price competitiveness of European companies. Business opportunities are likely to arise in the financial sector in particular, as the UK may lose its EU-access ‘passport’ for many financial services. Reduced growth and low interest rates are set to hurt insurance companies: low rates increase the discounted value of their liabilities, while lower growth will weigh on their assets’ value. Tourism could be affected by a weakened British pound. Brexit could further undermine the Transatlantic Trade and Investment Partnership negotiations.
5. Dun & Bradstreet recommendations
The Brexit Briefing Report makes multiple recommendations. Expect the euro to remain weak against the dollar and the other major currencies in the quarters ahead. Factor in lower growth when planning business decisions for the 2016-17 period. From a supply chain perspective, assume no major changes within the EU (at least in the next two years), and that the UK will continue to have access to the EU’s common market. Assume a prolonged period of market volatility: at least until the terms of the UK’s relationship with the EU are settled. From a trade perspective, be aware that both the EU and the UK want to maintain close relations, increasing the likelihood that both sides will eventually agree on some form of economic co-operation.
You can read the full Brexit Briefing Report here.