BREXIT: What's It Mean?

Monday, June 27, 2016

By Linda DiMario, Vice President, Irvine Chamber Economic Development & Toursim

In an effort to help our businesses understand, manage and mitigate the ripple effects of a decision made over 5,000 miles away, I turned to experts and those whose opinions are not colored by politics or economic gain or loss. Most economists and market watchers agree that there are short-term and long-term consequences to the United Kingdom's vote to exit the European Union - and yes, that means this decision will impact the global economy and the American economy. But how and to what degree?

So, here is a brief compilation of thoughts and opinions for your consideration:

Buckle your seat belts. This is just the beginning. Article 50 of the Lisbon Treaty forming the European Union outlines a two-year process for a member country to extract itself from the EU.  Considering the level of buyer's remorse being expressed currently, this controversial decision may be further complicated. Given the gravity of the negotiations and renegotiations of all the operational, political and trade agreements required, and the political and economic volatility emerging, this exit could take longer. Regardless of the actual timeline, this decision will most assuredly cause uncertainty in Britain’s economy and produce ripple effects over global markets more generally.

Put the initial market reaction into context. According to the polls, and now the recent polls of those who voted for exit saying they regret their decision, the markets are responding to a surprise, and the markets and investors hate surprises. Market turmoil was probably inevitable after a decision this significant. Watch the markets a week or two later for stronger signals on what this exit may mean to the U.S. and global economies. The U.K. is an important trading partner for the U.S., but even a recession in the U.K. will likely produce a modest impact on the U.S. economy. Much more important to monitor are the signs from the financial markets. The potential turmoil could make banks more reluctant to lend which in turn, could act as a drag on the U.S. economy. The U.S. Federal Reserve was sufficiently worried about this that they decided not to raise interest rates earlier this month, nor are they likely to raise the interest rates in July.

Good news, bad news. Travel to London may be more affordable but U.S. exports will be more expensive. In the wake of the vote, the British pound collapsed and now stands at £1.20 to the U.S. dollar. U.S. companies sold $56 billion of goods in the U.K. last year, making it one of our top trading partners. Depending upon how the U.K. plots their exit, the value of the pound and the value of the U.S. dollar against other currencies could be affected in such a way that the volatility influences exports to other countries. Matthew Peterson, chief investment strategist for Boston-based brokerage firm LPL Financial, said the long, uncertain process of disentangling the U.K. from the EU “means that any impact on the economy will be months or years in the future.”

The unexpected is the only certainty. There are still many more tremors to ride out in the coming months and years. There will be a new U.K. Prime Minister. How and when that happens will set the stage for much of what occurs next. Other EU countries are flirting with the notion of extracting themselves from the EU. Northern Ireland is talking about rejoining Ireland. Scotland who voted against the exit may hold a referendum to stay in the EU or try to legally block its exit. The Norway model is being floated. And two other scenarios are emerging:  the EU fails to survive or the U.K. exit never occurs because the EU sweetens the pot to retain the U.K. and another referendum is taken. Stay tuned.

So, what do we know? In the wake of the U.K. decision, President Obama said, “The United Kingdom and the European Union will remain indispensable partners of the United States even as they begin negotiating their ongoing relationship to ensure continued stability, security, and prosperity.”

The U.S., California and Irvine are global players. The California economy, the sixth largest global economy, is strong and growing stronger. Irvine's economy is powered by 21st century, cutting edge, always innovating and evolving life sciences, technology and advanced manufacturing sectors, which are in turn supported by a robust professional services infrastructure.

That being said, Irvine companies of all sizes are completely capable of riding out this volatile situation. Experts agree: Don't react, respond. Make good, long-term decisions based on data and sound intelligence. Evaluate your vulnerabilities and take action to mitigate exposures. And because Irvine companies are always forward looking, be prepared to seize opportunities presented by this turn of events.

 

Sources: Ben Casselman, Five Thirty Eight chief economics writer; Jim Cramer, Mad Money; Janet Yellin, Federal Reserve Chair; The Wall Street Journal; Bloomberg; The Guardian; CNBC; Business Insider and Financial Times.

Category: Economic Development