What Does Brexit Really Mean?

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Financial market turmoil and global uncertainty rose sharply in the hours after the UKs June 23 referendum on European Union membership. Stocks plummeted as traders sought to understand the implications for businesses and the global economy. With 51.9 percent voting to leave the union to 48.1 percent voting to remain, the pound fell to its lowest point in almost thirty years.

The resignation of the British Prime Minister and two years of negotiations over exit terms means this period of uncertainty is likely to continue. While there are several possible options for the future of UK, there is unlikely to be much clarity on negotiating positions for some weeks while the UK’s governing Conservative party seeks a new leader to take over as Prime Minister, and other European Union member states decide on their preferred next steps.

These are complex and volatile times, with many rapidly-shifting factors to take into account. For businesses with supply chains, markets or operations within Britain or the wider EU there is likely to be at least some disruption. Keeping track of the likely and more speculative implications, and planning accordingly, will require significant attention and agility.

We’ve rounded up some of the initial reactions and analysis from around the world. As it stands, the only thing that is clear about what happens next is that very little is clear and that desire for clarity will slowly be paid off over a series of months, if not years.

In Depth

The Impact On The Global Economy

The EU is the world’s largest market, with 500 million consumers and a combined nominal GDP of $18.5 trillion. Any changes to the future trade relations or policies of the UK or the EU could have significant implications for the world economy at a time when its future growth potential is already uncertain in the wake of the financial crisis and the Chinese slowdown.

“The uncertainty surrounding this event is unlikely to go away quickly. Though the shock to the UK or globally is not of Lehman proportions or likely to trigger a global recession, it is still a fairly negative event. Key uncertainties surround the impact on the European economy – where in addition to the likelihood of at least a brief period of recession in the UK, there may well be a knock to economic growth in Europe as a whole. Any setback in the European economy implies further weakness in global growth, which will be transmitted to the US and elsewhere through both trade and financial market channels (e.g. the strengthening of the US dollar).” – Tapan Datta, Partner, Global Head of Asset Allocation, Aon Hewitt

“In response to the British vote to leave the European Union, the American stock markets have moved more than they have in response to any presidential election over the past 60 years… conventional wisdom seems to be that Britain’s exit from the European Union will lead to economic disruption that will echo across the Atlantic.” – The New York Times, June 24, 2016

“We can have little confidence in any point forecasts at the moment. The sign of the effect on the economy of today’s vote is clearly negative given the economic uncertainty. But the size of the effect is less clear.” – Bank of America Merrill Lynch statement, June 26, 2016

“While Brazilian exports to the UK accounted for only 1.5 percent of the South American nation’s total trade, the impact of Brexit on sentiment is seen placing emerging-market countries with large current-account deficits at a more vulnerable position. A pronounced flight to safety could end up putting even more pressure on high-yielding currencies.” – Bloomberg, June 24, 2016

“For the global economy, there could be a cumulative hit of ~0.5pp from our baseline between now and the end of 2017. This weakening of the global environment would likely weigh on the Fed’s thinking. Our U.S. economists no longer expect the Federal Reserve to raise rates this year.” – Chief Cross-Asset Strategist, Morgan Stanley

The Impact On The United Kingdom

The UK’s Prime Minister has resigned, and its main party of opposition is facing a leadership challenge. There are suggestions that Scotland and Northern Ireland, and perhaps even London – all of which voted to remain in the EU by significant margins – could seek greater independence from the Westminster government. The country is undergoing a constitutional crisis, and its future direction and even political composition is, in the immediate aftermath of the vote, unclear.

“The Conservative leadership contest will last until at least early October, perhaps longer… The new prime minister could call a general election. It might be more than half a year until Britain has a leader capable of addressing the myriad crises now engulfing it. The country does not have that kind of time.” – The Economist, June 26, 2016

“Uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment. Medium-term growth will also likely be weaker due to less favourable terms for exports to the EU, lower immigration and a reduction in foreign direct investment.” – Fitch credit ratings agency statement, June 27, 2016

“Despite the noisy fallout from the vote… Our view as a bank is that the U.K. remains a large, well-developed economy with good long-term prospects. It’s our home market and our job as a leading bank here is to help it succeed.” – Ross McEwan, Chief Executive, RBS

The Impact On U.K. Employment

One of the key focal points of the referendum campaign was immigration, with the EU’s core principle of free movement of people blamed for a range of issues from strain on public services and social cohesion to unemployment. A reduction of the ease of employment for EU workers in the U.K. or U.K. workers in other parts of the EU could reduce access to talent, while also creating uncertainties for employees currently working outside their country of origin. At the same time, some multinationals have already indicated that they may consider relocating operations and jobs from the U.K. to other EU countries to maintain access to the European Union’s Single Market.

“Some sectors of the UK economy have come to rely on EU workers: they account for almost 8 per cent of the 5.7m people employed in shops, hotels and restaurants, for example. It is not clear whether a post-Brexit immigration policy would admit low-skilled workers… Three-quarters of EU citizens working in the U.K. would not meet the current visa requirements for non-EU workers.” – The Financial Times, June 24, 2016

“A majority of [British] business leaders think the vote for Brexit is bad for them, and as a result plans for investments and hiring are being put on hold or scaled back.” – Simon Walker, Director General, Institute of Directors

The Impact On The European Union

The decision of the EU’s second largest member state to leave the union has sent shockwaves through Brussels. As well as immediate concerns around the negotiations over the future relationship between the UK and EU, there is already talk of significant future reform of the European Union itself in the wake of a Brexit to strengthen the remaining union of 27 member states and make it more resilient to future shocks.

“The UK has been the [EU] member state with the most global outlook. Without it there is the risk of narrowing the E.U’s focus to regional challenges, which needs to be resisted.” – Stefan Lehne, Visiting Scholar, Carnegie Europe

“For many European voters, Europe appears to be part of the problem and not the solution which is very worrying. There is the risk of a domino effect. There’s a widespread feeling that the EU needs to be reformed. Those that feel the EU is part of the solution need to do much more to redesign it.” – Pier Carlo Padoan, Italian Finance Minister

The Impact On Financial Markets

London is one of the world’s most important financial centers, and some argue this is at least in part due to its position within the EU, which provides firms based there access to the broader European Union market. There are suggestions that, in the event of a Brexit, some of this access could be withdrawn. The UK is also the world’s fifth largest economy, so any uncertainties there are likely to have ongoing ripple effects through the global financial system.

“Financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated. The consequences for the real economy will be comparable only to the financial crisis of 2007-2008.” – George Soros, Chairman, Soros Fund Management

“As long as Britain is in the single market the City can remain a big European financial centre. If tomorrow, Britain is not part of the internal market, the City cannot keep its European passport.” – François Villeroy de Galhau, Governor, Bank of France

“Worries of a financial panic similar to the bankruptcy of Lehman Brothers or default of Greece look unfounded for now… Nonetheless, the drop in stocks is a sign of new risks surrounding the global economic outlook.” – The Wall Street Journal, June 26, 2016

“To assess the global impact of this surprise result, it is important to look beyond the trade channel. Once the financial, confidence and psychology channels are taken into account our warning is to not underestimate the depth and reach of financial market contagion to Asia.” – Nomura statement, June 25, 2016

The Impact On World Trade

The UK has been one of the EU’s strongest advocates for reducing tariff barriers with the rest of the world, and is its second largest economy. Its withdrawal from the EU will be unlikely to make the EU a less important market, but its traditional advocacy for free trade within and beyond the bloc – including for the proposed U.S.-EU Transatlantic Trade and Investment Partnership – could make future trade deals more restrictive.

“The European Union is one of the world’s largest trading blocs and it’s a major trade partner with China and the United States. If it breaks, it could lead to a lot of global uncertainty and many trade deals would need to be restructured.” – CNN Money, June 24, 2016

“There will be negotiations ensuing if the UK leaves the EU. So negotiations would be needed between the UK and the EU; the UK and other WTO members; and the countries with whom the EU has free trade areas… there are many scenarios out there, and most of them would be resulting in less favorable terms for trade.” – Roberto Azevêdo, Director-General, World Trade Organisation

“The vote to leave the EU means a retreat for a cooperative approach and it could throw cold water on various moves around the world involving market integration and free trade negotiations.” – Yorizumi Watanabe, Professor of International Politics and Economics, Keio Univeristy, Tokyo

“It’s hard to talk about and judge the direct impact on China’s economy. If [Brexit] is an important landmark in terms of a reversal of globalisation, I think that’s very bad for the world, it’s very bad for China.” – Huang Yiping, Professor, Peking University, and member of the Monetary Policy Committee, People’s Bank of China

Navigating Uncertainty

The only thing certain at this stage is that nothing is certain. Despite voting to leave the EU, Britain has not provided an exit strategy, or a vision for its future relations with the European Union. There are various possibilities, including a second referendum, but all have potential social, economic and political challenges. Amidst immediate uncertainty and shock of this historic vote, it is clear that it will take some time to resolve this new structure.

“While this historic moment is creating near-term volatility in the capital markets, it is important to note that the full regulatory impact of this decision will unfold over a period of at least two years as the UK negotiates the terms of the exit. While there will be significant commentary and speculation on the impact of Brexit in the days to come, it will be some time before we understand all of the implications for talent, innovation, foreign investment, trade and supply chains.” – Steve McGill, Group President, Aon Plc.

“Britain has many more questions than it does answers after last week’s referendum, with some political analysts arguing that a Brexit is not inevitable, despite it winning in the voting booth.” – Fortune, June 27, 2016

“It’s going to be the same UK and the same European Union, except that you’ll have to trade with them separately and you’ll have to deal with them separately. I think once the world is able to figure this out over the next few days as the situation settles down, the economies in terms of both stock markets and currencies will start leveling out.” – Arun Jaitley, Finance Minister, India

Further Reading