This brief article will discuss the effect of the Brexit on UK’s economy.
Let’s start by taking a look at foreign exchange data. On the 23rd of June 2016, we observed an impressive plunge of the Pound; for the GBP/USD it went from roughly 1.5 (before the vote) to 1.36 on the day after the referendum (xe.com, 2017). Same goes for the GBP/EUR ratio where in just a day it went from 1.31 (on the 23rd) to 1.23 on the 24th of June. It even reached a 5 year low at 1.10 in October 2016 (Bloomberg, 2017). It could be said that this plunge was easy to forecast but to what extent? Hard to say, what will need to be checked in the future is the purchasing power parity (PPP) of the UK compared to its ex fellow EU members. We could also look at the inflation rate of the country after it leaves the Union for good. With a slowing economy, we could hope for a slowly increasing inflation rate but a stagflation cannot scenario cannot be ignored. Even if the Pound has regained some value at today, it is complex to say how it will regain its all-time value. Will the EUR continue to grow after the French and German elections? Will the Fed continue to increase its rates? If yes then the GBP might face some issues but will it affect the
everyday life of the middle class British man? We will see. From a global perspective, it is clear that the developed economies have to find a way to stimulate their growth if they do not want to be outgrown by countries such as Brazil, Singapore and India. A solution for the country would be to become a tax heaven and attract numerous multinationals and the wealthy to boost its economy but how will that affect its population? (The Conversation, 2017).
The UK lost its top credit rating by the famous agencies of S&P, Moody’s and Fitch where it isnow rated AA, Aa1 and AA respectively and all have a negative outlook (Trading Economics, 2017). What does that mean? Interestingly, the Kingdom was not impacted greatly as it went from a prime grade to a high grade (to simplify it went from a 10/10 to a 9/10). We have anticipated a greater impact on the country’s borrowing cost looking at this disastrous impact it had on its currency and on its business partners. This small reduction in rating could be explained by, first of all, the strong economy of the country as well as its relative health compared to other. Indeed, the Queen’s land has a lower Government Debt to GDP ratio than the Euro Area (89.20% to 90.70%) and is lower than Belgium’s (106%), Italy’s (132.7%), France’s (96%)and Spain’s (99.2%). Also would that lower credit rating influence the country further? Not sure. The UK is an old land with a powerful financial sector and economy. We could expect developing countries to be significantly affected by such ratings but not behemoth like the UK which can ignore such ratings. The “negative outlook”, however, should be taken into account but is it reserved for the UK only or other countries from the Euro area are also victim of a negative outlook? Well taking into consideration the interconnected economies; it is rather complicated to say that a single euro country will surge while the other are plunging. With the actual peak of the world economy, it is rather safe to say that we should look at a stabling economy or a downward trend on Europe as a
whole, not a on single country. From a local perspective, the Bank of England has cut interest rates from 0.5 to 0.25 percent after the announcement of the Brexit. This action to stimulate the economy could help companies to borrow and give a boost to the GDP thanks to an increased number of mergers and acquisitions for instance. With a weaker currency, financial uncertainty and a hazardous environment it could be anticipated to see entrepreneurs and multinationals wanting migrating their office which leads us to the last point.
With the Brexit being announced, companies such as Morgan Stanley decided to relocate its headquarter to Germany. We see a migration of entrepreneurs and multinationals leaving the UK for more financial stability. Are they doing the right choice? Well it is hard to say; at this moment, we cannot assure what the government will do in terms of international policies. Will they raise or lower taxes? Will the interest rates go up? We are not sure. What should be looked at are the financial agreements between the EU and the UK. It is important that the UK does not isolate itself and still trades with the rest of the EU. Furthermore, the UK has to take care on how it will act upon its expatriates. It ought to retain the talents (whether British or international) who were educated and trained in the UK who risk to leave the country or not go there anymore due to over complicated policies. In case the Queen’s Land does not manage to retain the bright students it has formed, banks and multinationals are more likely to look elsewhere. We are here talking about large companies, if you look from a different perspective, let’s say of a Hedge Fund, the Brexit does not look like a major problem. Was the Brexit a Black Swan event? Taking into consideration that the Brexit was a long shot and that the existence of its idea was here for several years, we could expect companies and even countries to have created plans to compensate the loses which could be occurred due to the
Brexit. This may be the reason why the market did not crash completely. We might say that the current economic situation is more at risk due to political and economic instability of countries outside the EU. All in all, we assume that the UK will recover, with some time from its escape from the Union. It is now time to take a closer look at the French and German elections which will here affect the treaties and the economy as a whole.