Special report - Current state of play after vote for Brexit

We are now a week removed from the EU referendum and the British people voting to be the first country to leave the EU. This has seen a lot of turmoil spread through the markets and major political upheaval. With everything that has gone on, it is worthwhile taking the time to review what has happened and forecast what might be next.

One of the major concerns of remain campaigners is that Britain and London in particular would lose its positions as a global leader in the financial services industry. Their belief was that London currently does so well due to ‘passporting’, where non EU companies would locate and use Britain as a gateway to the EU. No longer being  a member of the EU, could result in these businesses moving to an EU hub causing a major loss to Britain. Yet some believe this is not as big a problem as it is being made out to be. Claiming that London has been a world leader due to its regulations, taxation, language and time zone. Being perfectly situated between Asia and America, whilst also being close to the rest of Europe. None of which Britain will lose due to Brexit.

Businesses and markets prefer certainty. Amongst the other potential causes of a slowdown, uncertainty about what will happen next cannot be overlooked. Businesses do not want to make major decisions whilst there will be major legal upheaval. There are many EU regulations that they have to abide by, which they may not need to after Brexit. But then the new British regulations will need to be followed. Firm’s are likely to hold off on investment and expansion until they know what rules they will have to live by. As well as delaying investment, they made hold back on hiring more workers. This could result in depressed growth due to a self-fulfilling prophecy.

A major cause of uncertainty is the current on goings at Westminster. Prime Minister Cameron will be stepping down and a leadership contest has been called. After some spectacular political manoeuvring from Gove, Boris Johnson, the face of the leave campaign will not be running. Leaving Michael Gove, the intellectual foil to Boris’ personality on the leave side as the key ‘leave’ campaigner running. However, it is the current Home secretary Theresa May who is seen as the ‘safe pair of hands’ and favourite to be the next Prime Minister. She was a Euro sceptic but supported remain and she could be the one to lead Britain out of the EU. All this political uncertainty means that article 50, under which a country announces its intention to leave the EU, has not been triggered. Cameron said it will be for the next Prime Minister to trigger and none of the potential candidates seem to be in a rush to do so. This is despite calls from other EU leaders to start the process as soon as possible to allow negotiations to begin. This produces another source of conflict, as Britain wishes to have informal negotiations before triggering article 50, yet the EU leaders say they will not begin negotiations until it is triggered.

The main opposition in Britain is also in disarray as much of their party wants their leader to step down. Jeremy Corbyn from the far left wing of Labour has been seen as ineffective and incapable of winning an election. There have been a huge swathe of resignations from the shadow cabinet and front bench and he now faces a leadership challenge after suffering a vote of no confidence. With both major parties squabbling over who will lead them, there is a lack of leadership come from Parliament at the exact time when it is most needed to guide the people and markets through this period of uncertainty.

Tourism and business visits of Brits to the EU and EU members to Britain is set to be affected by Brexit. In 2015, Brits made around 65 million visits overseas, a large majority of which were to the EU. The UK is visited 35 million times a year, a majority of which is from EU citizens. These visits boost the domestic economies and neither side will want to see this reduced. Firstly looking at tourism, it won’t be easier and could certainly become more difficult for tourist travel in both directions. However, you have to assume that travelling to the EU for a Brit, will not become more difficult than travelling to any other non commonwealth country. Therefore it is difficult to imagine Brits not going to EU but going further abroad instead. What would seem more likely is more domestic tourism within Britain. From the EU perspective, if there is more hassle to visit Britain they could substitute British holidays for holidays to other EU countries. Given that the market for British tourists to the EU is about 3 times the size of EU visits to the UK, both sides should seek to make the new rules as hassle free as possible. The value of the Pound will also influence tourism. The Euro has risen to 1.20 against Sterling, this depreciation of the Pound makes going abroad more expensive, encouraging domestic trips. But for Europeans, it is now relatively cheap to come to Britain and so this should boost our economy, at least until any travel rules are changed.

Of course, tourism is not the only reason for travel, business visit play a large part as well. There are 9 million business visits to Britain and 10 million visits to see family and friends. The other way, its 7 million business visits out of Britain and 14 million visits to family and friends. The impact on these types of journeys is a bit more complex. It will largely depend on the decisions of individual firms and whether they chose to reduce operations in Britain as discussed earlier. If there is a loss to business in Britain there will be fewer trips over here, but it is possible that if they relocated to Frankfurt, Paris or other EU hubs, then more Brits would need to go abroad. Either way, the impact is likely to be marginal compared to the actual business movements themselves.

Given all the turmoil, we may need to rely heavily on our central bankers to help the economy. Mark Carney, Bank of England Governor, has sought to calm markets and help boost the economy, or at least reduce the fall. He has said that the Monetary Policy Committee may vote to ease monetary policy, as early as the July 14th meeting. This could see them reduce the base rate to a new record low of 0.25% with pundits suggesting that they could further lower it to 0% in the future. Another option is to expand the asset purchase facility, which Mark Carney has suggested they might do. Whether they implement either or both of these remains to be seen, but it could have a drastic impact to encourage growth in an otherwise slowing market. The forecast is that Brexit will depress global growth and therefore it is not just the BoE that will need to respond. The European Central Bank has already indicated it may change the rules of its QE. Suggesting that they may need to expand the pool of assets which they are purchasing. This saw the Bund, the German 10 year bond fall and German yields rise, whilst other non-core countries saw their debt yields fall as the markets interpreted the ECB comment as a shift away from buying core debt. The Federal Reserve will have to revise their estimates and it is fair less likely now that they will need to raise rates in the coming months, or even this year. The Fed funds futures are indicating lower interest rates for longer.

A cited result of a Brexit prior to the vote was a collapse in the Housing market. With many suggesting a fall of 10%, perhaps up to 20% if Britain were to leave the EU, with London experiencing the largest fall. A mitigating factor though is that the path for interest rates seems to be lower for longer, making mortgages more attractive and affordable. Either way, the need to build more affordable housing will still remain, so that industry shouldn’t suffer. Although, potentially they may struggle to find workers if it is more difficult for Eastern Europeans, who form a large part of our construction labour force, to work here.

The overwhelming majority of forecasts prior to the referendum suggested that the Economy would be worse off after a Brexit. However, there were some who suggested that leaving would actually be a boost to the British economy and they are touting the benefits that a Brexit will bring. The depreciation of Sterling will have positive impacts, as imports from abroad become more expensive and the competitiveness of British exports goes up. It could also boost private service sector business, such as private medical clinics and Universities. Britain has some of the world’s best Universities, but also amongst Europe’s most expensive. The depreciation could encourage more students to come here, as the world’s growing middle class seeks to send their children to receive the best education. This boost to domestic industries could spark growth.

If you asked a leave voter why they voted leave, the most common answer would be a desire to better control immigration. Although, whilst negotiations haven’t begun yet, it seems that if Britain wishes to have access to the European market as it currently has, it will be unable to limit the free movement of people. If there were to be tighter migration controls this could have advantages for Britain, as the overall skill level of migrants could improve. Currently, all EU citizens are free to come to Britain, yet there are limits on those coming from elsewhere, even if they are highly educated and looking to work in skilled professions. Should EU migration be restricted, then perhaps more immigrants would be able to come from further abroad and add value to the economy.

Unsurprisingly, the immediate result of the Brexit vote was a flight to quality as appetite for risk dissipated. Global equities markets tumbled and over $2 trillion was wiped off the value of the global economy. At points on the Friday after the vote many indices were nearing 10% down on the day, but a recovery saw them rise a long way off their lows. The Pound tumbled and the Euro weakened as well, bond yields globally fell to all time lows and Gold rallied as a safe haven. This week has seen quite a stunning turnaround in the performance of global equities, with the outperformer being the FTSE. The FTSE is over 200 points above where it closed the day of the referendum and is at 10 month highs, sitting above 6550. Perhaps an indication from investors, that all hope is not lost and that Britain, Europe and the Global economy will not suffer as much from a Brexit as many people believe.

Picture courtesy of Mick Baker via flickr

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Reuters: Business News