24th June 2016
Britain votes to leave the European Union
Europe stands at a critical junction
After a head-to-head race between supporters and opponents, Britain has voted to leave the European Union. The implications of this historical decision will become clearer over the next few months. The uncertainty of Britain’s future relationship with the EU and its other trading partners will be a drag on the UK economy. The vote is a wake-up call for EU politicians to address voter concerns and recognize the need for a redefinition of the European integration process.
Hefty market reactions after Britain’s decision to leave the EU
The die is cast. In a historical decision, Britain has voted to leave the European Union. A majority of 52% of voters were in favour of leaving the EU, with a turnout of 72%. The initial market reaction around the globe was hefty with a general flight so safety. The pound plunged more than 11% against the dollar to reach the lowest level in three decades at some point, while the FTSE 100 fell almost 9% before recovering as trading wore on. Market volatility will remain high in the coming days and weeks as investors are trying to get a first grasp on the implications of the vote to leave.
Central banks stand ready to act
To avoid a negative feedback loop and mitigate pressure on the banking sector, the Bank of England (BoE) has announced that it will provide an additional 250 billion pounds to support the financial system. Further policy steps including
potential rate cuts are possible. Similar to the BoE, the European Central Bank (ECB) has said it will give banks all the funding they need. Meanwhile, the Swiss National Bank and the Bank of Japan intervened to reduce upward pressure on the franc and yen.
Brexit increases the break-up risk for the United Kingdom
While the initial market impact is significant, the longer term prospects for the UK are unclear. Given the considerable EU support in Scotland it is very likely that the question of Scottish independence will be put back on the table, potentially leading to a break-up of the United Kingdom. Britain leaving the EU will also influence the situation in Northern Ireland where politicians have already called for a poll on a united Ireland.
Uncertainty will weigh on the British economy
Although Britain remains a member of the EU for the time being, political risks may be a drag for the UK economy for years to come. The next step in the separation process will be to trigger Article 50 of the Lisbon Treaty. This will start the formal process of leaving the EU. The article suggests a two-year negotiation period to set out the arrangements for a country’s withdrawal. However, it will most likely take much longer to negotiate the future relationship between Britain and the EU. Both parties have an interest in finding a beneficial solution but the EU will avoid being too soft as it does not want to encourage other members to follow Britain’s example. In addition to the discussion with the EU, Britain will have to renegotiate numerous trade agreements with other countries around the globe.
The uncertainty with regard to the future relationship of the UK with the EU and its other trading partners will be a significant headwind for business investment.
Consumers will most likely curb spending as well, at least until the future path becomes somewhat clearer. While Brexit is not the end of the world for the UK economy we do expect a significant slowdown in the coming quarters.
Brexit increases fragmentation risks for the rest of the EU
The UK decision to leave the EU has important implications for the rest of the European Union and the Eurozone. From an economic point of view the UK is one of the EU’s most important trading partners, representing around 16% of the rest of the EU’s exports of goods and services, or around 3% of GDP. So a slowdown in the UK will weigh on Eurozone growth. However, the wider political implications could be much larger and more negative than these purely trade linkages.
We expect financial market volatility to remain high in the short term. In the longer term, the viability of Europe will be determined by policy makers taking decisive action to address the electorates concerns, as the time for half measures has run out.
Source: YouGov
Should the UK remain a member of the EU or leave the EU?
46%47%48%49%50%51%52%53%RemainLeave
Disclaimer and cautionary statement
This presentation has been prepared by AAA CK Life Pensions and Mortgages Ltd t/a CK Financial Solutions and the opinions expressed therein are those of AAA CK Life Pensions and Mortgages Ltd as of the date of writing and are subject to change without notice.
This presentation has been produced solely for informational purposes. The analysis contained and opinions expressed herein are based on numerous assumptions. Different assumptions could result in materially different conclusions. All information contained in this presentation have been compiled and obtained from sources believed to be reliable and credible but no representation or warranty, express or implied, is made by AAA CK Life Pensions and Mortgages Ltd
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