Step away from the panic button…
The Brits will wake up on Monday morning and …… go to work and do the same things they do every Monday morning. The only difference will be they now know they will be exiting the European Union (EU).
This has ramifications for England, Wales, Scotland and Northern Ireland (especially as over 60% of Scots voted to stay in the EU) and there will be a lot of conjecture on the impacts this will have internally and externally.
There will be some seat shuffling in British Parliament and Boris Johnson (the only man who makes Trump’s head of hair look tidy) may well be the next Prime Minister.
The Brits have two years to leave the union but the rhetoric from the EU over the weekend would suggest this will happen sooner than that. No matter what the urgency, it will still be a complicated process and unwinding this relationship will take months of negotiations and yes, a lot of lawyers will be involved. David Cameron will travel to Brussels this week to brief the EU leaders though he has stated that he won’t trigger ‘Article 50’ which starts the two year countdown. He will leave that to the next British Prime Minister.
This is a very big deal for Britain economically and it really comes down to trade agreements. Between Europe and Britain there is more than $575 Billion of annual trade (Britain exports approx. 44% or 223Billion pounds of its goods to the EU) and it is important for both sides to negotiate its continuation. Unfortunately that won’t be easy and the EU will have the additional complication of not wanting exiting its Union to look too easy. If it was just business you could see a resolution but they will have EU members using the situation to their advantage, both politically and economically.
The EU took over seven years to negotiate a trade agreement with Canada and they ‘like’ them. They can easily string negotiations out while rewarding their other members.
So what does it mean to Australia?
- Uncertainty: … which breeds volatility in investment markets. This will provide some good buying opportunities but in the short term our investment managers will not be rushing into anything. Many are holding excess cash already and have flagged they will be waiting for the dust to settle.
- Trade: The UK is a significant trade, investment and tourism market for Australia, ranking second in investment, third for inbound tourists and seventh for two way trade. Historically any negotiations were done via the EU. Now our government will be negotiating trade agreements directly but Britain will need to exit first.
- To put this in perspective however, 32% of our exports go to China, 19% to Japan and then 8% to Korea. The UK takes 4.4% closely followed by NZ with 4.1% – Minerals and gems, beef and alcohol make up a large part of this.
- We do buy 2.4% of our imports from the UK and the lower currency will mean their goods are more attractive. The largest imports sectors are cars and medical supplies. We import approx. 22% of our goods from China, 11% from the USA and 7% from Japan
- Tourism: The pound has already dropped by over 10% on Friday 24thof June, though it may rebound during this week. This will reduce inbound tourism in the medium term as it becomes more expensive for the British to come here but if you have any plans to visit the Queen’s country, it just got a lot cheaper.
We will receive a lot more information in the coming weeks but this will be an issue that will impact Britain for many years to come and probably won’t help world growth.
So in summary, some impact but no reason to make Europe’s problems our problems. Yes volatility and yes some opportunity but we can be patient.