The Brexit: Finimize’d

Fear itself can be� quite frightening!

The future of trade with Europe and other countries would depend on future agreements – which are uncertain�

Some say foreign investment in Britain would decline sharply� and the pound would fall in value

Economists don�t agree on the long-term effect of a Brexit on the British economy

So� what could a Brexit mean for you? There will almost certainly be short-term pain. Will there be long-term gain?

1. ����The value of the pound would likely decline further. Of course, that makes it more expensive for Brits to go abroad. But it also pushes up the cost of anything that Britain imports (which is a lot of stuff). So, things would likely get at least moderately more expensive (a.k.a. inflation would rise).
2. ����Property prices might decline… but that�s far from certain. One theory is that foreigners would be much less likely to invest in UK property and/or the exodus of financial services jobs in London would lead to less demand for housing. Mortgage rates might go up (which would put pressure on housing) if interest rates go up – however, as Brexit has appeared more likely, the financial markets have sent interests rate down – so it�s tough to tell what would happen to mortgage rates. But a weaker pound is very likely and demand for property generally increases as UK property becomes cheaper for foreigners to buy – so property prices could be supported.
3. ����Jobs might suffer. In particular, many international financial services firms, JP Morgan, have warned that a Brexit will lead to jobs being moved to cities like Frankfurt, Paris and Dublin. Other industries are likely to get hit by the uncertainty as well, but some of them could benefit (e.g. the weaker pound could easily lead to an influx of tourists and make it easier to sell British goods abroad).
4. ����Expect stimulus to take place. In the event of a Brexit, expect the UK government and the Bank of England to do supportive things to offset the short-term weakness (like increase government spending and/or decrease interest rates). This should mitigate some of the short-term downside.

1. � ��Uncertainty is high. So much depends on factors that we just don�t know at this stage, like what Britain�s post-Brexit arrangement with the EU would be and how Britain and Europe�s economy will fare going forward. In the longer term, it will be a question of how Britain�s future policies effectively drive its own growth, within or outside of the EU.

There�s been a HUGE amount of noise surrounding the economic implications of the United Kingdom leaving the European Union – the so-called Brexit. We�re going to cut through that noise, explain what the economic impact of a Brexit could be and how it could affect you.

Fear itself can be� quite frightening!

The uncertainty alone has already curtailed economic growth to some degree (for example, businesses tend to hold off purchasing new machinery if they are uncertain of the future environment). A vote for a Brexit would increase uncertainty in the immediate term, at least as negotiations between Britain and the EU on their future relationship take place (the existing arrangements remain in place for up to 2 years while a new relationship is negotiated). This will likely dampen economic growth in the near term.

The future of trade with Europe and other countries would depend on future agreements – which are uncertain�

In its simplest sense, a trade agreement allows good and services to be sold across borders without incurring extra taxes. British firms, right now, can trade freely with other countries in the EU and are automatically a party to any free trade agreement that the EU negotiates with other countries/blocs. And free trade is generally thought to be good for economic growth.

The question, thus, becomes how badly Britain�s trading relationships will be harmed by leaving the EU. The answer depends a heck of a lot on its future relationship with its trading partners (both the EU and other blocs). Many feel that the remaining EU members would seek to �punish� the UK for leaving (in an attempt to discourage other EU members from leaving) and would only accept terms that are worse for Britain than the current arrangement (and perhaps much worse). Others suggest that it�s in Europe�s self-interest to trade as freely as possible with Britain and will, therefore, seek to negotiate a new free trade agreement that won�t be substantially worse than the current one. This is a political calculation that is pretty darn difficult to handicap ahead of the event. �

The other bogey to consider is how Britain�s trading relationships with other major countries would develop if it were to negotiate its own trade deals. While some argue Britain won�t be able to adequately negotiate its own trade deals with other countries (Obama has said they�ll be at the �back of the line�), others point out that, as the world�s fifth biggest economy, it is in many countries� interests to develop trade agreements with Britain – and that Britain might do better to negotiate those trade deals itself (and purely in its own interests).

Some say foreign investment in Britain would decline sharply� and the pound would fall in value

You�ve probably heard a lot about how a Brexit would lead to a collapse in the value of the pound. That prediction is based partly on the idea that the ensuing uncertainty would cause foreigners to hold back from investing in the UK � and therefore demand for the pound would fall significantly. It�s further suggested that access to the entire EU is what drives a lot of the investment into the UK in the first place (e.g. American banks that set up shop in London so they can service European clients) – and that could be gone for good.

Another argument posits that many international investors, when faced between the choice of the EU without Britain and a standalone Britain, would choose to invest in Britain. In other words, after a period of uncertainty, foreign investors might find Britain to be a relatively attractive place to invest in – and that would be positive for the value of the pound.

Economists don�t agree on the long-term effect of a Brexit on the British economy

Perhaps the most widely reported and alarming statistics regarding the economic impact have come from the UK government�s Treasury Department: a guaranteed recession in the near term and an economy that will be 6% smaller by 2030. Another study, by the OECD (a supranational economic organization) says Britain�s economy would likely be 5% smaller by 2030. However, respected independent firm Capital Economics believes the impact of Brexit will be neither necessarily worse nor better for the UK economy. And other economists predict it will actually be positive for the economy.

So� what could a Brexit mean for you? There will almost certainly be short-term pain. Will there be long-term gain?

In the short-term:

1. ����The value of the pound would likely decline further. Of course, that makes it more expensive for Brits to go abroad. But it also pushes up the cost of anything that Britain imports (which is a lot of stuff). So, things would likely get at least moderately more expensive (a.k.a. inflation would rise).
2. ����Property prices might decline… but that�s far from certain. One theory is that foreigners would be much less likely to invest in UK property and/or the exodus of financial services jobs in London would lead to less demand for housing. Mortgage rates might go up (which would put pressure on housing) if interest rates go up – however, as Brexit has appeared more likely, the financial markets have sent interests rate down – so it�s tough to tell what would happen to mortgage rates. But a weaker pound is very likely and demand for property generally increases as UK property becomes cheaper for foreigners to buy – so property prices could be supported.
3. ����Jobs might suffer. In particular, many international financial services firms, JP Morgan, have warned that a Brexit will lead to jobs being moved to cities like Frankfurt, Paris and Dublin. Other industries are likely to get hit by the uncertainty as well, but some of them could benefit (e.g. the weaker pound could easily lead to an influx of tourists and make it easier to sell British goods abroad).
4. ����Expect stimulus to take place. In the event of a Brexit, expect the UK government and the Bank of England to do supportive things to offset the short-term weakness (like increase government spending and/or decrease interest rates). This should mitigate some of the short-term downside.

In the long-term:

1. � ��Uncertainty is high. So much depends on factors that we just don�t know at this stage, like what Britain�s post-Brexit arrangement with the EU would be and how Britain and Europe�s economy will fare going forward. In the longer term, it will be a question of how Britain�s future policies effectively drive its own growth, within or outside of the EU.