Brexit... Impact on the economy

Opinion Monday 27/June/2016 15:00 PM
By: Times News Service
Brexit... Impact on the economy

Britain's decision to leave the EU, the world's largest trading bloc, is considered a significant blow, as this change might re-determine the economies of many countries. There are challenges which are unseen and cannot be predicted, as multiple factors will play a vital role in the days to come.
The member states that are most exposed to the fallout caused by Brexit are the Netherlands, Ireland and Cyprus. Each has very strong trade, investment and financial links with the UK and, in the case of the Netherlands and Ireland, are closely aligned in their nations’ policies. Among larger member states, Germany would be affected through several channels, but perhaps most profoundly by the loss of the UK as a counterweight to France in policy debates.
France may welcome the absence of the UK in policy debates but, like Spain, has substantial direct investments in the UK. Italy is less directly exposed to Brexit, while Poland’s interests are concentrated on the impact Brexit would have on the EU budget and the large number of Polish residents in the UK. All member states would, however, regret the loss of international influence enjoyed by the EU without the UK,as well as the damage that Brexit would do to the global esteem of the EU.
Many U.S. companies invest in the UK as a gateway to Europe's market. Companies such as Rolls Royce and JPMorgan warned before Thursday's vote that leaving the EU would put those investments and jobs in the UK at risk. Large companies and banks may also move staff to Germany or France to avoid disruptions to their EU businesses.
What does this mean for markets in Asia? Policy makers in Japan, Korea and India are saying there will not be much impact, in terms of their respective countries' real economies. They are trying to reassure investors and keep markets calm. Japan Inc. employs some 140,000 people in the UK, and has about $59bn (£40bn) invested there. Large Japanese car manufacturers, such asToyota, have already said a Leave vote may lead to 10 percent duties on UK-made cars sold in the EU.
Asian companies, which have set up operations in the UK to gain access to EU markets, will also have to reassess the situation. Certainly, Asian business leaders are watching the process of how the UK transitions out of the EU very closely. If there is a material impact on EU economies, Asia will not escape unscathed.
Over the years, Britain has played a significant role in promoting Chinese relations with the union. This is the reason why many analysts believe that Britain’s exit from the European Union will lead to difficult trade and investment agreements between China and the bloc. Indeed, Brexit may lead to unexpected challenges for Asian economies, with Japan likely to bear the brunt of the pressure, mainly because of a stronger yen. Currently, Toyota exports almost 90 percent of the cars it manufactures in the UK - and three quarters of those go to the EU.
Additionally, the decision by the UK to leave the European Union has an impact on India on multiple layers. India is presently the second largest source of Foreign Direct Investment for Great Britain. One of the main reasons for this is the historic and cultural ties with the UK that India shares, along with the fact that the UK proved to be a gateway to the rest of Europe.
Britain would not want to lose out on capital coming in from India. Thus, one can expect Britain to try extra hard to woo Indian companies to invest in the UK by providing much larger incentives, in terms of tax breaks, lesser regulation and other financial incentives. Indian companies can expect a deregulated and freer market in Britain.
Considering the Exit, India will forge ties with other countries within the EU, which would be positive in the long run. India is already trying to build trade negotiations with the Netherlands, France, Germany and others, albeit in a small way. The Netherlands is currently India's top FDI destination.
Brexit affects the rupee through both trade and financial channels. Further, the UK and European Union account for 23.7 percent of the rupee’s effective exchange rate, according to Nomura Research calculations. The UK’s exit could lead to a prolonged period of risk aversion in the equity markets, which could spark foreign portfolio investor outflows and add to the rupee’s weakness.
While on the positive side, Brexit has driven away fears of a US Federal Reserve Bank rate hike, and could lead to lower commodity prices, but there is a side effect: it could open more room for RBI to cut rates, which would not be a positive for the rupee.
IT and other companies, which have significant revenues from Europe and the UK, will be affected and may be avoided, as the extent to which the Pound will be impacted will be unknown, as Indian IT companies receiveanywhere from 6 to 18 percent of their revenues from the UK.
The UK has traditionally been the gateway for Indian IT firms to enter Europe, and they have set up a large presence in the UK to serve EU markets from their headquarters in London.
The immediate fallout of Brexit on the IT industry in India would be the impact of the decline in the value of the British pound, which would render many existing contracts to become losing propositions, unless they are re-negotiated. India invests more in the UK than in the rest of Europe combined, emerging as the UK's third largest FDI investor. Access to European markets is, therefore, a key driver for Indian companies coming to the UK, as per CII.
Britain ranks 12th in terms of India's bilateral trade with individual countries. It is also number seven among the top 25 countries with which India enjoys a trade surplus. According to data from the Commerce and Industry Ministry, India's bilateral trade with Britain was worth USD 14.02 billion in 2015-16, out of which USD 8.83 billion was in exports and USD 5.19 in imports. The trade balance, thus, was a positive USD 3,64 billion.
London has been a popular investment destination for quite a few countries, as half of the investments in the UK come from the EU – but a great chunk of investment trickles down from China, the US and the Middle East.
Middle East investors have continued to buy real estate in the UK, despite fears about the UK’s future in the EU. The majority of Middle East property investors preferred the UK to remain in the EU, while half of these investors have also expressed concerns that London’s decision to leave the EU will have a negative impact on their investment strategies.
As most Middle Eastern currencies are pegged to the US dollar, due to the USA being the largest oil importer, the weakening euro and pound has resulted in beneficial opportunities for investors.
Britain gains much more from the EU than it pays as contributions. Despite the bureaucratic hurdles, British companies have unfettered access to the entire European Union. Lastly, Britain would not be able to shut its doors to immigrants, even if it exits the EU, because if it chooses to trade with the bloc, it would need to accept some share of outsiders within its borders.
Official trade statistics show that the European Union is the destination for about half of all British exports of goods. The trading links are even larger, if the countries in which the United Kingdom trades freely with have a free trade agreement with the European Union. These agreements mean that 63 percent of Britain’s exports are linked to European Union membership.
Financial services have more to lose immediately after a European Union exit, than do most other sectors of the economy. The National Association of Estate Agents believes housing prices in London could see the biggest change, losing up to £7,500, on average, over the next three years. Also, several experts have predicted that the economic shock of leaving the EU would cause unemployment to rise in the UK. That would reduce the pressure for wage growth.
There is no sound plan regarding Britain's future relationship with the EU or any other country within the EU. Will they continue to have access to European markets? Will trade barriers increase if they leave? Are there any agreements with the Union regarding the movement of goods, capital and labour? These are the important questions that are left unanswered by those advocating for Britain to leave the EU. And it is precisely the uncertainty over these questions that are disrupting financial markets across the world.