Late last week, in an historic referendum, the UK voted in favour of leaving the European Union (Brexit), with the majority of voters (52%) opting to leave the trading bloc. The move by the UK introduces more volatility into the global market and this is likely to detract from global business confidence and investment over the rest of 2016 and into 2017.
The pound has already fallen to its lowest level against the US dollar since 1985 and a difficult and uncertain task may lie ahead in divorcing the UK from the EU. Much uncertainty remains on how the process will unfold from here.
The UK must formally notify the European Council of its decision to leave. Prime Minister Cameron has stated that notification would be up to his successor, who is not likely to be in place until September or October. Once notified, the EU would formally commence talks on a range of issues between the UK and other EU members. If no deal is reached or there is no agreement to extend the negotiations, membership would terminate two years after notification. In the meantime, the UK would continue to abide by EU treaties and laws.
Apart from the economic fallout affecting demand and the general business climate, for Australian businesses exporting to or investing in the UK there should be no immediate impact on access or regulatory regimes.
Depending on the path it now takes, the UK may also need to commence negotiations over the range of bilateral and multilateral agreements that could be required to replace those it currently participates in courtesy of its membership of the EU.
The UK will also need to work out a practical way to deal with the myriad of EU laws and regulations currently enmeshed into the UK political and economic system. A ‘one by one’ approach involving Parliamentary consideration of each item on an individual basis would appear infeasible. At the other extreme, an omnibus bill converting all EU laws and regulations into UK law is unlikely to gain support.
The uncertainties over trade and investment access and over the regulatory requirements that will eventually replace those currently in force are likely to continue for a considerable period. They will raise the costs and risks of doing business with the UK.
Australian businesses will also be affected by the domestic fallout. The Australian dollar slipped against the US dollar and the Japanese yen on the news but rose against the pound and is mixed against other currencies. Brexit makes the future trajectory of the AUD even more uncertain.
The RBA maintains some ability to deal with global ructions that may result and the effects of Brexit could place some pressure on the RBA to cut rates further if the resulting market volatility impacts consumer confidence. However, the RBA admits that the impact on the Australian economy is still unclear.
In the near term, Brexit adds more downside risk to global growth which necessarily affects Australia’s growth prospects.
For further Brexit analysis by the Ai Group Policy Team, click here.
Does your business have any concerns regarding the Brexit decision? Share your thoughts and comments below.
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