Brexit: Impact from the Sector Perspective

Brexit financial markets reaction chart GBP
Brexit financial markets reaction chart GBP

Fallout from the Brexit Referendum

The UK electorate voted to leave the European Union (EU) in a nationwide referendum held in England, Scotland, Wales and Northern Ireland on June 23rd. The “Leave” vote prevailed by a majority of 51.9% on a turnout of 72.2%. While the UK remains an EU member state pending a formal withdrawal process (which may take two years), immediate jitters have been observed on the financial markets. Uncertainties surrounding the potential exit from the EU are fuelling pessimism within the business community and this climate does not bode well for any industry with a stake in the UK economy.

Fallout from the Brexit Referendum

Effectson the Bond Markets (UK and other major EU markets) The UK’s benchmark 10-year government bond yield continued to decline as the Bank of England indicated further monetary easing would be introduced. Declining yields were also seen throughout the EU as investors sought out safer asset classes and the markets reacted to expectations of more monetary policy expansion.

Trade-related Implications

Strong Trade Linkages with EU In the event of a Brexit, the UK must renegotiate the free trade deals it has access to as an EU member state as well as access into the European Single Market, unless it decides to negotiate a new arrangement to access it as a non-EU member state. It is uncertain if the UK will be able to retain present trade linkages, with a number of alternative trade arrangements on the table, and no decision taken yet explaining which will be pursued.

Trade-related Implications

Major Exports & Imports and Sectors Most Likely Affected by Brexit

Brexit and the Manufacturing Sector

The UK is a major European manufacturer of ICT products. While the country retains many of its comparative advantages despite Brexit –an English-speaking workforce, ease of doing business in UK, size of UK’s domestic markets, among others –the loss of the “automatic” access to EU markets may prompt manufacturers to reconsider their investment decisions in favour of moving to an EU-member country (in the event of a Brexit).

Brexit and the Manufacturing Sector

Similar to ICT manufacturing, the UK is a major player in the European automotive market. Given the relative complexity of motor vehicle production, coordination of Europe-wide production networks may be more challenging if differing EU-UK regulatory standards, tariffs and other cost of labour transfers are increased in the event of a Brexit.

Brexit and the Banking Sector –The Global Financial Hub

The UK –and notably London -has long established itself as one of the world’s major financial centers. While the UK will likely maintain that position, weaknesses in the pound, and the loss of confidence over Brexit uncertainties, among other factors, may undermine the historical advantages of the UK as a financial sector in favour of competing EU financial centers (principally Dublin, Frankfurt, Luxembourg and Paris). The UK banking sector has played a special core role in the European Single Market.European banks are highly active in the UK financial sector, taking advantage of its sophisticated capital market structure and high liquidity level to conduct cross-border financial activities under the EU’s “passporting” rules which effectively amounts to a single EU-wide banking license. With Brexit, banks located in the UK will no longer benefit from the EU’s passporting rules and this will greatly affect the attractiveness of London as the European headquarters of financial institutions around the world.

Brexit and the Banking Sector –Talent Matters

HSBC has indicated that it will remain in the UK in all but the most extreme Brexit scenarios –a reversal of the Chairman’s previous assertion that jobs could move across the Channel in the event of a Brexit. Barclays has similarly scrapped its crisis plans despite the result of the Brexit vote. However, the Brexit vote has created much uncertainty on Britain’s role as a global financial hub in the event that Britain leaves the EU. This threatens to increase the flow of financial talent out of Britain to its continental partners. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog

20th July 2016 Brexit: Impact from the Sector Perspective

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