‘Dubbed the most expensive divorce in the history of the world, Brexit shockwaves are reverberating around the world.
From a cursory perspective, Brexit jitters have sent the GBP reeling, dethroning this majestic currency from its mantle. From a rate of 1.48:1 against the USD, GBP is now a shadow of its former self, trading at 1.21:1. Sterling’s performance is anything but its namesake.
While the pound remains one of the darlings of the developed world, its appeal has certainly lost some shine since the fateful June 23, 2016 Brexit referendum. Now, some three years later, the chickens have come home to roost and the UK economy is all the poorer for it.
One must consider a smorgasbord of speculative sentiments vis-a-vis the impact of Brexit on the GBP and broader UK financial markets. There is something to be said about the resilience of the UK economy in the face of overwhelming adversity. True to form, there is innate strength to all things British. Perhaps it harkens back to the colonial superpower’s glory days as master of the seas and foreign lands.
The imperial age was certainly a glorious time for Britain and all its people. It seems absurd that a contractual agreement with Europe has the capacity to tear the empire asunder, yet we see dark clouds gathering on the horizon. The appointment of Prime Minister Boris Johnson has not eased the tensions; it appears to have exacerbated them.
It is difficult to speak of facts and figures in concrete terms since the world has never dealt with such a macroeconomic conundrum. Sterling has taken a pounding from traders, investors, and speculators in the years since the 52%/48% pro-Brexit referendum. While this has certainly benefited the UK export market, it has crippled domestic consumers who rely on foreign imports. The trade-off tilts against the UK, with net imports far greater then net exports. The trade balance reflects as much.
According to Research Briefings from the UK Parliament, the balance of trade for goods and services in the UK in 2018 reflected an overall trade deficit of £31 billion. Consider that the U.K.’s trade deficit with the European Union amounted to £64 billion, compared to a £33 billion trade surplus with countries outside of the EU. This evidence does not bode well for the UK economy, given that so much trading activity takes place with Europe which has heretofore been associated with customs and duty-free agreements.
If one were to warrant a guess on this matter, perhaps the imposition of taxes, customs and duties, regulatory constraints, and other as yet unknown elements between the UK and the EU post Brexit will widen that gap dramatically.
The problem of course is that we are dealing with too many unknowns. We don’t know whether the UK will be able to offset its EU losses with new trade arrangements with the US, Canada, China, and elsewhere. The European Union certainly holds tremendous economic leverage in the world, serving as one of the top three power blocs. The others include the United States and China.
How will UK financial markets be impacted by Brexit?
For now, we will likely continue to see capital flight from the United Kingdom. The uncertainty is the driving force. Nobody knows whether Prime Minister Johnson will successfully negotiate a settlement with his European counterparts, given that erstwhile Prime Minister Theresa May failed hopelessly in that regard. Johnson has repeatedly stated that he is quite prepared to crash out of the EU by October 31, 2019. A bold and brash statement that may be, but financial markets don’t like it.
We have seen in no uncertain terms a withering away of confidence in UK financial markets. While the FTSE 100 index has stop started throughout 2019, it has held the line above 7,000 since late January. It rallied briefly towards the end of July, before plunging spectacularly. At around 7147, the FTSE 100 index is roughly 400 points higher than its level at the start of the year.
It is safe to say that markets can expect GBP weakness to continue through the October 31, 2019 deadline. GBP weakness is central to the performance of the entire UK economy, and that of its trading partners. Should London lose its status as the financial epicenter of the region, billions of pounds in much-needed tax revenues will be lost in the London Metropolis. Countless thousands of jobs rely on European, Asian, and American corporations setting up shop and maintaining activity in London.
We have seen sufficient evidence to suggest that other global cities are being considered in lieu of London. Cities like Paris, Dublin, and Frankfurt are thought of as rivals to the City of London (SPERI Global Political Economy Brief #6). An article in the New York Times indicated that many UK businesses are already suffering heavily after the 2016 referendum. Capital flight has taken place with the closure of many global banks, financial services corporations, automobile manufacturers and so forth. Britain’s credibility has been affected.
Exodus of Global Corporations from the UK
Some of the many companies that will not be seeking UK operations include Japanese automaker Honda, Nissan, The European Medicines Agency, and hundreds of other companies which are now closing up shop and repatriating assets and personnel to other parts of the world.
By April 2019, some 5000 jobs had already been lost in the City of London, and monetary transfers estimated at £900 billion + have already left Britain (Banks, management companies, and insurance companies). The passporting rights that these financial institutions enjoyed with Europe have disappeared, meaning that they will have to renegotiate deals, arrangements, and connections with each member country all over again. Rather than risk the loss of so much business, it makes more sense for them to simply relocate where they already enjoy all of those perks.
It would be feeble to discount any positives which may come from the Brexit decision. As a society, speculators inherently gravitate towards a resistance to change. The UK relationship with the EU was revered and reviled at the same time. Time will tell what will become of sterling and the UK economy given the uncertainty we now face. It is safe to say that short-term fears will trump long-term expectations, and the UK economy will contract heading into October. A weaker GBP is enough to do precisely that on its own. That being said, a negotiated settlement with Europe, though unlikely could halt the decline and serve to bolster the financial markets.’
