The United Kingdom decided to vote for exiting European Union on June 23th of 2016. With 52 % in favour and 48 % against leaving the EU, the UK took a veritably risky leap out of EU membership. As the numbers show, the votes were extremely close and the country was divided in the middle on whether to stay or leave. The probability of remaining as a member was 90 % which indicates that only 10 % of investors were prepared for an actual exit.
Brexit had a huge move on the financial markets as it blew away global confidence. It had a negative impact on all asset classes and sectors, this caused investors to” abandon the ship” and to flee to the safe harbours’ of United States’ bonds and Japanese yen. The British pound made the largest drop in history, it collapsed by 10 % against the USD. This was also due to investors’ worry over the international economic conditions, and the fear of other nations eyeing an exit out of EU. Britain also lost its high AAA rating which basically means that the cost of government borrowing will rise.
The overall impact on global economy was huge and the most impacted economy was undoubtedly UK’s economy itself. Official trade statistics show that about half of all British good exports are destined to European Union. The trading links are even bigger if the countries that Britain trades freely with are included. Britain had a free trade agreement with European Union and it means that 63 % of Britain goods exports were linked to the membership of European Union. Brexit would give Britain an opportunity to break its own deals with non-EU countries and Britain could even have a unilateral free trade policy. Non-European Union countries may find trading easier and quicker than dealing with whole European Union as Switzerland has shown.
Uncertainty surrounding the impact of Brexit could hang over the market for two or more years as details of the actual exit such as new trading rules and political negotiations are unfold. Britain represents 2 % of global growth while in the European Union is 16 %. The Brexit has triggered a debate about the durability of the EU and whether other countries would consider exiting too, which could put pressure on bond markets, especially on corporate bonds. This also creates another issue for banking and financial sector. This sector is already struggling with low to negative interest rates and the sector could be facing more problems in the future as if Brexit causes the European Central Bank or Bank of England to enact more incentives to keep the economy on track.
Predictions about Brexit’s impact on economy are mostly speculation. The absence of seamless accesses to European markets also may mean fewer exports and foreign investments. Brexit may also contribute an economic slowdown as companies hire fewer people and consumers spend less.
There is no way to tell what will happen next in the global economy and clearly there is a lot of uncertainty within the markets. Only time will show whether UK trading arrangements will stay focused on European Union or will they turn more outside Eurozone and, in the process, what the balance and costs are as a result. European Union has lost one of its most powerful military country, as no one has ever abandoned EU membership and there isn’t any instructions on how to handle a situation like this as peacefully as possible.