What is Brexit?
Brexit (stands for the shorthand name for Britain and Exit: British Exit from the EU) was one of the important economic events that happened in the recent days. There was a referendum conducted for the polls to vote for the BIG QUESTION Should the UK remain a member of the EU or leave the EU. It mainly happened due to the recent rocky relationship between UK and the EU.
There were two main sides to the referendum, namely the ones that supported and the ones that opposed UK being a part of the EU nations.
Leave camp: The leave camp had argued that the referendum would give Britain the chance to gain back all the control lost in EU bureaucracy. Immigration was also one of the major points with the leave camp arguing that this would be a way to get control on the borders. With too many rules and regulations for business Britain was held back by the EU, which would now free it from the clauses.
Remain camp: The remain camp on the other hand argued that UK is much stronger, safer and better off by staying with Europe. With billions added by EU into the British economy, it would be wise to stick back. Contradicting the immigrants issue, the ones who promoted staying back, argued that the flow of immigrants, most of whom are young and keen to work, fuel the economic growth and help pay for public services.
So finally, after all the assumptions and presumptions the final verdict of the referendum had UK walk out of the EU nations. The majority votes were in favour of UK getting out of the EU and thus Brexit happened.
WHAT IS THE ECONOMICAL IMPACT?
The exit of Britain definitely is one of the important outcomes that will have impact on all other economies for sure at different wavelengths.
For the European country there are fresh negotiations expected as half of UK’s exports go to EU while on the other hand half of its imports come from the rest of the Union.
As a NATO member, UK which makes huge military expenditure, the moving out of it from EU would make it a less powerful entity.
It is not a very great news for its counterpart in trade and military, the US. There would a complete shuffle of the scheme of things between US and UK post the decision taken.
How does it impact India?
The decision is expected to have varied repercussions on every country that is connected with the financial markets and India stands no exception to the impact.
Uncertainty all across: There is high level of uncertainty as there is no plan chalked with regards to Britain’s future with the EU or any other country in the EU. The financial markets have strongly depicted the volatility, indicating the hit that all economies are feeling post the decision. India didn’t stand immune to the effect proved by the bloodbath across the indices on declaration of the results.
Would look for other options: With the exit of Britain, India is at the risk of losing its entry into Europe. This definitely would speed up the efforts of India trying to build trade negotiations with France, Netherlands and Germany, with Netherlands being the top FDI destination for India as of now.
Positive for our talent: In-spite of the walk out, Britain will always need inflow of talented labour and India fits in perfectly with its English-speaking population. With Brexit, the universities that had to give subsidized rates for UK and EU citizens will no longer be obliged to do so and that will help free up funds for students from other countries as well.
Tie ups with European Union: After brexit, it would be in Europe’s interest to develop India as a strong strategic and trade partner. It would have to counterbalance US and China as well as hedge against the slowdown in China for its own economic interests. India would be one of the fastest-growing major economy in the world that Britain would focus on for strong lasting relations.
From investment point of view: India is currently the second important and biggest source of FDI for Britain. Post the walk out, Britain will not be as attractive a destination for Indian FDI as before. This would lead to more efforts from Britain’s side to maintain with India, opening up lucrative regulations and providing additional financial incentives.
Other positives for India:
- India can save on its import bill due to the drop in commodity prices like crude.
- The rupee would also be impacted but that also should be handled well by India owing to the strong forex reserves and the RBI intervention expected to rule out any unusual volatility.
- With regards to the emerging markets, India stands out as a great investment destination and expectations of larger investments by the UK cannot be ruled out.
FOR UK:
- UK real estate prices are expected to correct
- Inflation will rise due to expensive imports
- London’s financial center status may be threatened if money flow is hampered.
- There will be a substantial drop in the sterling due to the volatility and uncertainty around.
- Capital flows could be impacted due to stricter regulations from within the EU and outside it.
Brexit impacting Britain economy:
There are negative impacts expected going forward, indicated by the market volatility. Critics have indicated that the economic effects could be large. The UK government has estimated that exit from the EU could cause British economy to be between 3.8 and 7.5% smaller by 2030, all depending on how well negotiations for access to the European market ultimately go. (Source: Vox)
The other important impacts to be considered are:
- Inflation to rise:
A drop in the value of pound means that imports would become more expensive., leading to higher inflation. The effect would be gradually visible with first the price rises being confined to imported goods like food and clothes and then inflation to gain momentum for secondary articles.
- Interest rates might rise:
There is a legal obligation on Bank of England to keep interest rates it as close to 2% a year. If drop in the value of pound threatens to push prices up faster than this, then the Bank will raise interest rates. This indicates that the in a couple of months’ inflation will be on an upswing, taking the economy to enter recession.
- Negative sentiments:
Indeed, the decision to leave EU was a shock to all economies. This is because it changes the perspective and future expectations about the economy’s performance. Although it’s a matter of two years for the Britain to leave the EU, the negative sentiments would lead to pulling back of money from investors as well as companies, owing to the lesser confidence than before. This would lead to an impact on the economy impacting different investment decisions. (Source: OpenEurope.org.uk)
Impact on trade between Britain and world:
In order to comply with the EU rules, exporters would have to face additional costs if they were outside the single market. With the kind of scenario that Europe is in like decreasing importance of Europe, falling tariffs, decline in manufacturing, there has to be a trade deal between EU and UK.
Britain would get the chance to lead its own trade deals with non-European Union countries; something in line with unilateral free trade policy. Also the non-European union countries may find negotiating with Britain much easier in the absence of European Union’s bureaucratic framework.
The possibility of tariffs on goods exported to the European Union indicates downside potential, while on the other hand it would also help in opening up trade with other countries. It could also increase the sector’s competitiveness through greater competition and cheaper inputs. Net it is probable that the impacts of Brexit on trade would be relatively small.
The UK trade links with the European Union are considerable where the EU is the destination of about half of all British goods exports (about 45% if services exports are included). As per different researchers, 63% of Britain’s goods exports are linked to European Union membership. This leads to the strong possibility that there could be a trade agreement reached advantageous to both the sides. The trading links are bigger if we include the 60 countries that the UK trades freely with, because of the free trade agreement with the EU. With the exception of Germany, Britain is a more important market for the European Union economies than they are for the United Kingdom.
The negative Brexit scenario would be one in which the UK failed to negotiate a free trade agreement with the EU. However, in this scenario also, the losses for British trade or manufacturing industry would not be that bad. Maximum if it happened then the British exports to the EU would have to face common external tariff. However, this won’t be the case for all sectors or regions. A few examples, the average tariff that could be imposed by the EU is 4%, varying across sectors and food and drink product sectors would be hardest hit. The car industry would suffer from a 10% tariff on cars and a 5% tariff on imported components.
How has Brexit affected the pound?
The pound has fallen to its lowest level in more than 30 years against the dollar lowest level since 1985, following the UK’s vote to leave the EU. Alongside the pound, the euro, which was expected to struggle due to the worries of fueling an antiestablishment movement in other EU countries, also dropped sharply against the dollar.
The pound is at the risk of moving downwards from the top ranks of the central-bank asset holdings, post the Brexit decision. Also, world’s leading reserve currency, sterling has been overtaken by the dollar and the euro, replicating U.K.’s declining influence in the global economy.
Other factors:
- UK imported more than $625bn (£474bn) of goods and services in 2015; mainly from Germany, China, the Netherlands, US and France. (Source: BBC news).  A falling pound means that these imports will become more expensive, leading to price hikes.
- Further, the weak pound will impact prices of commodities like clothing where majority is imported. There has also been a warning that supermarket prices (as the wholesale cost to UK retailers will increase) could rise if the pound’s fall continues. The cost of diesel or petrol is set to rise faster.
- On the other hand, the falling pound is good news for exporters as it means that the products become cheaper and thereby more competitive.
What does the street expect?
Analysts across the street expect long period of economic and political turmoil which will lead to pressure on UK markets following back on sterling’s "Black Wednesday" in 1992 when Britain was forced out of the pre-euro Exchange Rate Mechanism.
- Morgan Stanley expects that the pound should fall to between $1.25 and $1.30.
- HSBC also went ahead to cut its quarter end and year-end forecasts for sterling. It expects sterling to fall to $1.20 by the end of 2016. (Source: BBC)
Credit ratings:
Britain has lost its final gold-plated AAA rating, following Standard & Poor’s decision to downgrade the country by two notches, to AA. S&P warned that the Brexit vote will lead to “less predictable, stable, and effective policy framework in the UK” and hurt growth. Fitch, another major credit rating, has also downgraded Britain to AA tonight, from AA+.
Conclusion:
The exit of Britain is definitely going to impact emerging markets with companies having significant exposure to UK. But the other side of it is that with the waning of impact of London, India has the opportunity to emerge as a major global financial market. So there are both opportunities as well negatives in the times to come. There is a gradual unfolding that needs to be awaited to get clarity about where the economies are placed.
Brexit panic wipes $2 trillion off world markets – as it happened.
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