The Road Less Traveled: Britain Post Brexit
The global economy has endured significant upheaval since the June 23 referendum which resulted in a break from European Union. The decision, while not legally binding, is an advisory one which UK political leaders have taken into consideration for the upcoming general elections. That Prime Minister David Cameron has decided to resign in October is especially significant. There are all manner of implications in the political arena, given the tumult in the Labour Party and the Conservative Party. The race is officially on for the Prime Minister’s office at 10 Downing Street.
The political arena remains a hotbed of uncertainty, and the economic implications thereof are dire at best. It should be remembered though, that Britain has done nothing as of yet to initiate the divorce proceedings from the European Union. In order to do this, the Prime Minister’s office would have to invoke Article 50 of the Lisbon Treaty to begin the painful process of separation and disentanglement from the EU. How great the disruption may be remains uncertain. In the short term, there is increased volatility, driven mainly by the political upheaval as a result of the Brexit vote.
The United Kingdom currently has all of its trade agreements in place with the European Union, and nothing as yet has changed. However, there are moves afoot by major multinational companies (automobile manufacturers, banks, financial juggernauts and the like) to reassess their base of operations in the United Kingdom. If and when companies decide to move their headquarters from the City of London to other European capitals, this will directly impact on employment, investment and ultimately the overall economy of the EU and the UK. Once again, it should be remembered that UK citizens are free to work and travel anywhere in the European Union and vice versa. Nothing as yet has changed.
Businesses across the UK have been stunned by the Brexit referendum. But it’s the long-term uncertainty that has given rise to high levels of volatility in financial markets. For the remainder of July we can expect instability in financial markets to continue. But as we approach August we will start to see economic data becoming available including figures on industrial production, retail sales and employment. Regardless, it is evident that the UK economy is buckling under the strain given the weakness in the GBP. The pound plunged to its lowest level in 31 years against the dollar, a week ago. It should be noted that GBP weakness against the EUR is not as severe and remains at a 5-year average level. However, not everything is doom and gloom for the United Kingdom. A weak GBP is especially beneficial to UK exporters who can now provide the global economy with relatively cheaper goods and services. On the import side, things are relatively more expensive and more GBP will have to be spent per US dollar of imports.
