Brexit: Uncertainty is the only Certainty
By Andrew Jones and Erin Sutton, PKF Corporate Finance
Whether or not you agree or not with the Brexit result, what we all can agree on is that we are in for some uncertain times ahead. It could take some two or more years for the United Kingdom (UK) to negotiate their terms for exit from the European Union (EU). During that time, the UK is required to obey EU treaties and laws, but not take part in any decision making of the EU.
So how could Brexit affect us?
It has been a couple of days since the Brexit outcome and whilst we have felt some immediate shockwaves from Brexit - the ASX dropped nearly four per cent with billions wiped off the exchange in one day - no one can accurately determine the longer term consequences of such a decision. However, below are a few keys areas that could affect Australia:
In the current environment of increased uncertainty investors are reallocating capital to less risky assets such as US Treasury Securities, gold, Japanese Yen and US Dollars. In the absence of any other significant adverse global economic development we expect that the current flight to safety will not continue into 2017. This may result in a reduction in the level of capital available for new investment in the short term.
Australia is due to commence negotiations of a free trade agreement with the EU in 2017. It will now need to negotiate a separate agreement with the UK. It’s worth noting that:
- The EU is Australia's largest services export market. Services account for 20% of Australia's trade in goods and services;
- 48% of Australia’s export of services to the EU are currently via the UK;
- 51% of the EU’s $169b in foreign direct investment came from the UK; and
- 66% of Australia’s foreign direct investment into the EU went to the UK.
Any slowing of growth in the UK and EU will flow through to demand for Australian exports, which may have wider repercussion for the level of economic growth in Australia. Most economists, however, believe that the Brexit does not signficantly increase the risk of a recession in Australia. The current low inflation and low interest rate environment is likely to continue over at least the next two to three years.
In this environment of increased volatility and uncertainty your business needs the financial capacity to withstand any significant changes to economic drivers. It is important that you understand the potential impact of changes in demand in your key markets, foreign currency rates, interest rates and the availability of equity and debt capital for your business. We recommend that you incorporate rigorous sensitivity analysis into your short and medium term financial planning and develop strategies to respond to potential shocks to the business.
On the personal front
UK migration policy is currently heavily influenced by the EU. Now the UK will have the freedom to change the migration policy and may make it easier for Australian’s to study or work in the UK.
Once the Brexit comes into effect travel to the UK may not allow automatic entrance to the EU. Australian travellers may therefore need additional visas.
That UK holiday could be a lot cheaper due to the weaker pound. The Australian dollar is now (at time of writing) buying 55.6 pence.