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Economic Impact of Brexit, What the future holds for world economy

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“Financial market volatility following the referendum in the United Kingdom on EU membership has been short-lived. However, uncertainty about the global outlook has increased, while incoming data for the second quarter point to subdued global activity and trade.” (— Economic Bulletin of the European Central Bank)

The campaign for the referendum on the question of UK’s leaving or remaining within the European Union was marked by claims about what would or wouldn’t be the economic impact of the vote. But, one thing was absolutely clear that the UK’s decision to leave the EU, or more commonly Brexit, will have far-reaching consequences for all areas of British as well as global economy for years to come. A statement issued by the European Central Bank on 4th of August highlighted the fact that the global economic outlook has become more uncertain after Britain’s vote to leave. 

On June 23, Great Britain passed a referendum to become the first country in the European Union’s (EU) 60-year history to leave. The vote sparked concerns about the impact of Brexit on global economic growth and spawned volatility across financial markets worldwide. While some people praised this event as a historical moment, many more asked how severe the potential economic fallout may be. The impact of Brexit on global development has quickly become a chief concern. This is so because Britain’s political landscape is one of the main contributors reshaping the global economy.

Before the Brexit referendum, output growth was moving slightly upward. But, since then, the British economy, and that of the world at large, has been in turmoil and the global growth outlook has been revised marginally downward. Alongside the torrid days for the financial markets, there is growing evidence that the real economy is slowing. Although it is not possible to assess the real economic impact of Brexit, because official data have not yet been published, there is a smorgasbord of other indicators of economic activity which hint at how the economy is doing after Brexit.

The Brexit, which left many people wondering what the future holds for the global economy, has not proved to be a “Lehman moment,” as it did not cause a financial market freeze similar to what followed the fall of Lehman Brothers in August 2008. It is encouraging to note that markets have stabilized and the recent economic data has been solid. This is heartening because the global economy is so deeply intertwined that pulling on one thread always means varied effects elsewhere.

As regards the matter of the impacts of Brexit, these were felt primarily in Britain. As a direct result of the vote, Prime Minister David Cameron resigned from his position, while the British currency fell to its lowest in three decades.

Markets have absorbed the initial economic shock from Brexit, but navigating the new landscape will remain a challenge. The current volatility is likely to continue until the market comes to terms with what leaving the EU means for both the UK and the wider global economy.

At present, the nature of the exit is still to be determined, and so it will be some time before the dust truly settles. Negotiations on the UK’s divorce settlement have not yet begun, and cannot begin until the British government triggers Article 50 of the Lisbon Treaty, which allows a country to leave the EU. Once negotiations begin, the UK will have two years to unravel some 80,000 pages of laws binding the UK to the EU. However, new Prime Minister Theresa May has said that she will not “push the button” on leaving the EU this year.

Prior to the vote, Stuart Rogers  wrote: “The consequences for UK taxation would most likely depend upon the nature of the exit, as there are any number of models (or ‘deals’) that the UK might agree on with the EU as time goes on.” As the UK exported 44 percent of its goods to the EU in 2015 and spends £288bn annually importing from EU member countries, the continuation of a harmonious trade relationship is certain to be a priority for both sides.

To that end, there is still a push within the EU to maintain the current trade relationship with the UK even after Brexit’s formalisation. Other countries worldwide may well follow suit, as it is in everyone’s interest to bring a measure of normality back to an uncertain climate for trade. The UK will need to enter into negotiations for major trade deals with China and India, diversify its international trading relationships and open up new bilateral investment opportunities. If either side doesn’t make a simple agreement to keep calm and carry on, then many headaches can be expected; FTA negotiations are notoriously lengthy and are unlikely to be resolved until the Brexit is fully complete.

Cooper Parry believes that the current volatility is likely to continue until the market comes to terms with what leaving the EU means for both the UK and the wider global economy. They recommend owning a well-diversified investment portfolio that has exposure to global equities and the emerging markets, as these types of portfolios should be less affected than those containing a bias toward the UK market.

One positive effect of Brexit may be that the UK becomes attractive as a tax haven by freeing itself of EU regulation. Mangion has written that the British government will do its best to attract new business by offering exemptions following the devaluation of the pound and a reduction of corporate tax below 12.5 per cent.

After over 400 years of cordial business relations, we can expect that the UK’s absence from the EU will see trade developing economies increase, especially as the EU is refusing to restart negotiations on a long-stalled FTA.

In Africa and South America, the silver linings have been harder to find. Several currencies have suffered as fragile economies have been rocked by the sudden lack of clarity in their traditionally open trade relationships with the UK. The atmosphere in many areas is reminiscent of a post-earthquake period of damage evaluation.

Slowdowns marked the Brexit vote in more developed economies as well, though to a lesser extent. Even prior to the vote 40 percent of small business leaders were making decisions based on the possibility of Brexit, with 15 percent postponing entering new business relationships until there was greater clarity. A more recent study in the US found that 28 percent of US mid-sized companies planned to slightly or significantly decrease their investments in the UK following Brexit.

Though we’ll only start to truly understand the longer-term implications of Brexit once Article 50 is triggered and negotiations between the UK and the EU begin in earnest, some takeaways seem clear. Brexit may reduce the cost of doing business in the UK, and a weakened pound may make investing in the UK a more attractive outcome.

The UK’s new freedom to sidestep EU rules on trade is likely to mean a medium-term boost for countries that have been rebuffed by EU trade requirements. Trade may increase in Commonwealth countries, particularly if deals between the UK and the rest of the world aren’t fast-tracked. With all eyes on the UK and Europe, the worldwide implications of Brexit may be less well-known but are no less important in shaping the investment climate of tomorrow.

UK is Pakistan’s largest trading partner in the EU. Nearly a quarter of Pakistan’s exports to EU (textiles, garments, leather goods, sports goods and food items) land in UK; besides consumption in UK, a significant portion is further supplied to Continental Europe. However, analysts believe that Brexit will have a relatively small impact on Pakistan’s economy. Even Pakistan’s minister of commerce has reassured the country that Brexit will not affect Pakistan’s exports to the EU.

Brexit, due to depreciation of pound and euro, would make Pakistani exports more expensive in EU and British markets. Already, owing to the euro depreciation against dollar in 2015, Pakistan’s exports to EU decreased by 11% in dollar terms despite an increase of 9% in euro terms, thereby neutralising the GSP Plus advantage. The depreciation of both sterling and further depreciation of euro would amplify the negative impact on Pakistan’s exports to EU and UK.

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