THE ELECTORATE HAS
SPOKEN and in a stunning victory
for the Brexit campaign, the UK is to
leave the European Union. But what
does the vote really mean – how will
our economy
and businesses
be affected?
The first
point to note
is that article
50 of the
Lisbon Treaty,
the clause that
determines
how a member state leaves the EU, is
not, despite the former Prime Minister
David Cameron’s original promise,
going to be triggered immediately.
Not unsurprisingly, Mr Cameron
resigned saying that it will be the job of
a new party leader and Prime Minister
to start the exit process. That person
is now Theresa May. But if law rm
Mishcon de Reya wins its argument,
article 50 cannot be triggered until
Parliament repeals the 1972 European
Communities Act – the legislation
which enshrines the UK’s membership
of the EU – irrespective of what
politicians declare.
Immediately after the vote was
announced, Mr Cameron tried to
steady the ship – something that Mark
Carney, the Governor of the Bank of
England and George Osborne, the
Chancellor of the Exchequer at the
time also wanted to do. However, the
markets were clearly in a panic.
Consider that in the summer of 2015
the pound against the euro had risen to
€1.42, but by the start of the week of
the vote it was down to €1.24. As the
polls closed it had risen to €1.31, but
once the vote result was made public it
dropped through the floor to €1.22.
However, now that we have a new
government and some form of stability
it has recovered to (at the time of
writing – 15th July) €1.20. The dollar
did something similar and fell to €1.32
– a 10% fall to a rate not seen since
1985 – but is back up to almost $1.34.
Not good but it could be worse.
The London stock market saw just
as much turmoil and had fallen more
than 8% over the morning after the
vote before recovering to only being
4% down – again, something not seen
since the collapse of Lehman Brothers in 2008, the precursor to the last
recession.
Other global markets followed suit
– Italy was down 11%, Germany fell
7.5%, and France had lost 9%. By 15th July, London
was 5% up on
the pre-vote
close while
other markets
recovered too
but were still
underwater –
Italy was 7%
down, Germany 2% down, and France 3.5% down. The
only saving grace is, as Mr Carney put
it, that the banks have more cash in
reserve and have been stress-tested so
that bank failure is very unlikely.
So what now?
UK law, at least that based on EU
legislation, isn’t going to change
overnight and in many cases will
mirror whatever Brussels passes. Why?
Because if the UK is to trade with
Europe we’ll have to comply
with their rules.
In other
domestic
matters, such
as health and
safety and
employment
law, the former
follows much
which is
common-sense
and with regard to the latter, it would
take a very brave government to repeal
legislation that gives, for example,
workers holiday entitlements and rest
breaks while offering protection from
discrimination.
What will be interesting to see is how,
post-exit, UK firms do in recruiting
staff as it’s entirely possible that the
automatic right of EU nationals to live
and work in the UK could be curtailed
(and vice-versa).
But there are other areas for concern.
Will the UK stay part of the Single
Euro Payments Area, the system for
simplifying cross-border euro bank
transfers? While the UK is not part of the eurozone, many firms will have
euro accounts.
There will also be issues with the
free movement of goods, capital and
people. Border controls will change
and firms buying or selling in Europe
may well find that tariffs and controls are imposed, adding increased cost and
time when moving goods.
The flipside is that the UK will be
free to negotiate its own trade deals
with non-EU countries and it’s arguable
that importers could see some duties on
goods fall – with much manufacturing
done in the Far East that could be
something positive.
Further, in the short term, and until
the pound recovers fully, the cost of
imports will rise while exporters should
be able to capitalise on their position of
being more competitive.
Many commentators believe the
end result of a weak pound, however,
is going to be rising in ation which
in turn will place extra pressures –
including that on demands for rising
pay – on businesses already struggling
to cope with rising competition.
A serious element to consider is the
cost of oil – priced in dollars – and the
Petrol Retailers Association predicted
the 3p per litre plus rise in fuel despite
a fall in the price of oil. This will price
itself into both oil-based products and the cost of
deliveries.
While the
Bank of England is not
going to make
any knee-
jerk reaction
changes, and
Mr Carney was
very calm when
he addressed
the cameras, the reality is that he said the bank would
take “all necessary steps” to support the financial system.
Clearly the bank had already drawn
up contingency plans which included
deploying up to £250 billion to support
the pound and quite possibly altering
interest rates – some suggested that
rates could rise to make the pound
more investable while others were
advocating that rates could fall to
zero (from 0.5%) to shore up the UK
economy.
Interestingly, the markets didn’t
react much when interest rates weren’t
changed when the Bank board met in
July despite widespread anticipation of
a rise.
Misery for some
Leaving the EU – and the run-up to the
event – could bring misery for some.
As noted, the stock markets have fallen
and the banks and the housebuilders in particular have seen their shares hit
badly – at the time of writing Bovis
Homes shares were down 25%, as were
Taylor Wimpey and Persimmon.
Looking at home and electricals
retailers, Dixons Carphone was down
22% and AO had lost 13%. Could
this be a forecast of the end of the
housing boom? Could homeowners and
consumers start to feel a chill? How
will this slowdown affect consumer
spending patterns in other areas?
Share performance depends on profits
so those investing in exporters should
do well. But by extension, others may,
depending on business sector, perform
less favourably as the falls in the stock
market have proven.
This will undoubtedly affect those
with pensions, ISAs and other forms
of stock-based investment. And if the
Bank of England steps into helping the
economy with more quantitative easing
(in essence, “printing” electronic money)
it’ll adversely affect bond rates which,
among other things, will lower annuity
rates for pensioners.
It’s badly timed, but the government
announced at the end of June that
household incomes had risen to an
average £473 a week – £800 a year more
than in 2013 to 2014. It’ll be interesting
to see the gures announced in June
2017.
Taxation
While some suggest that elements of
taxation could fall away because of the
end of being a net contributor to the
EU’s coffers and the removal of the
requirement to have a minimum rate
of VAT (15% for standard rated items,
5% on domestic fuel), others including
the Institute of Fiscal Studies believe
the government’s austerity programme
could be further extended even though
the former Chancellor had planned to end the programme and also lower
corporation tax to 15%. The decisions
rest with the new Chancellor, Philip
Hammond.
Could the vote lead to a further
political break-up? Possibly. Politicians
in other member states are calling for a
vote – Marine Le Pen in France, Mateo
Salvini in Italy and Geert Wilders in
the Netherlands. And then, of course,
Scotland’s First Minister is now angling
for another independence vote and
there were calls from Sinn Fein for a
vote on Northern Ireland’s status.
One thing is certain: we are now
slowly walking towards a brave new
world.
