On June 23, 2016, the people of Britain called quits on 43 years of being a member of the European Union. The decision was a highly contested one, with ‘votes to leave’ beating ‘votes to stay’ by just 3.8%. Nevertheless, this small gap sent a shockwave across the world and marked the beginning of a global event. The UK is scheduled to depart from the bloc at 11 p.m. GMT on March 29, 2019: but it could take years, if not decades, for the country to completely adjust to the move.
However, the effects of the impending departure have already started to show, and it is safe to say that they will continue to emanate in the post-Brexit future. Brexit has already contributed to a slowing economy in the UK, with the pound falling in value. The depreciation of a currency serves as an indicator of various economic factors, one of them is a drop in growth.
Brexit hits Britain hard
A major impact of a cheaper pound on companies based in the UK is the higher cost of doing business across borders. Ernst and Young estimated the loss of finance jobs in the UK at 10,500 by day one of Brexit. What’s more alarming is nearly a third of the companies based in the UK confirmed a move to mainland Europe; this means a big drop in jobs in the country.
With the British government yet to make a call on the terms of the departure, there is ambiguity surrounding trade regulations for both EU and non-EU countries. As things stand now, Britain could either accept the EU trade regulations and retain its market access or assume control of regulation and lose market access.
But the higher cost of business and trade regulations are only the tip of the iceberg. A recent study reveals that the uncertainty of the situation has led to a 20% drop in FDI since the 2016 referendum. This is the sharpest decline in overseas investments the nation has witnessed since FDI records began in 2003.
This could be a result of speculations around a ‘hard Brexit’ and the UK losing free access to the EU single market. Exports from the UK are facing the brunt of such speculations. Since the decision to leave the EU, the UK has experienced a 13% decline in exports. This effect was observed even in commercial exports, which are often priced in USD. Industries like travel, tourism, transportation, education, and banking experienced stagnancy during the 18 months following the referendum.
The global ripples of a regional event
One of the most profound indicators of Brexit’s impact in the US, Britain’s largest investor, was the 610.32-point fall of the Dow Jones Index. The fact that investments in the UK have acted as a gateway to free trade with the other members of the EU only increases the intensity of the threat to US businesses.
Brexit caused the fall of both the pound and the euro, and subsequently increased the strength of the dollar. A higher dollar value meant American shares were now expensive to foreign investors. As a result, the US economy took a hit and gold prices went up 6%.
In the EU, however, the economic impacts are not as direct or as immediate as in the United States. Instead of an economic upset, Brexit instigated a political sentiment similar to one that fuelled the referendum in the UK. Anti-immigration parties have been getting stronger across Europe. With enough traction, these sentiments could push for an anti-EU vote and change the face of the European workforce. On the other hand, recent polls suggest that a large number of people share the view that the UK opting out will smoothen the process of drafting EU policies.
Britain’s decision to leave the EU is also expected to have repercussions in Asia, especially on the technology industry. A weaker pound and euro translates to vulnerability for hardware suppliers based in China. Attempts to raise prices locally to offset fluctuating foreign exchange rates could lead to a drop in demand. With Europe as its second-largest market for IT-BPM services, India could also be looking at a reduction in service demands on account of an imminent recession phase.
Japan, on the other hand, faces an economic threat stemming from a stronger yen. With the falling pound, investors have begun putting faith in more currencies, one of which is the yen. Japan’s “Abenomics” policy which relies on a strong stock market and a weak yen, sees this as a threat. As a result, the Mizuho Research Institute estimates a slump in stock and a reduction in capital investment levels by 1%.
The rise/fall of opportunities
The slowing economy and a weaker pound could have a dual impact on British businesses. On the one hand, for UK-based enterprises that rely on imported goods, the current economic condition means a higher cost of doing business. But on the other hand, for UK companies that earn revenue in the UK in competition with overseas companies, a lower value of the pound could translate to cheaper products, leading to a boost in business. The economic implications within the UK, however, remain vulnerable to developments leading up to March 2019.
Shifting the focus across the North Sea into the EU offers another vivid picture of economic possibilities. A ‘hard’ Brexit disabling the free trade opportunities for companies in the other five continents could be the cause of London’s fall as a business hub. This isn’t a far-fetched situation: nearly 20 banks have committed to base EU operations in Frankfurt since the referendum. But it’s not just Germany that is gaining at the cost of Britain’s trade uncertainties. With its less volatile regulatory landscape, the EU is set to become the next destination for companies based outside Europe.
Implications for the IT sector
In the tech space, Brexit leaves a gaping hole of ambiguities. Data privacy is one example. As of May 25, 2018, members of the EU are protected by the General Data Protection Regulation (GDPR). But with Britain’s imminent exit, it is unclear whether Britain will continue to comply with the statute. This has caused companies to adopt a wait-and-watch strategy by putting IT deals on hold till the cloud of uncertainties lifts.
Yet, opportunities are aplenty. As cross-border tariffs and legislative restrictions materialize, IT expenditure is expected to grow. This is bound to increase the need for cloud computing to reduce business costs. Shared data centers are also witnessing a surge in investment owing to expected IT budget cuts. But all of these possibilities remain dependent on the UK’s stand on the terms of departure.
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