I
will make a confession. I never really understood Brexit in full. I thought I
had the right picture in my mind but looks like I was wrong. This post is my
honest attempt to add colour and shape to the theory of Brexit. I am not going to delve in the political
aspects of Brexit however I am going to set the table for its business and the
economic impact.
B
|
ritish Prime Minister
Theresa May might ask for an extension to finalize on Brexit. She hopes that
she can bring a turnaround by convincing the MPs that Brexit is altogether a
great idea. Nevertheless, this action did portray her to be an unstable leader
with a majority which is dangerously at risk. Her constant efforts towards the
appeasement of the right wing failed and the nearest alternative she can lay
her hands on is soft Brexit. Soft
Brexit is the option which makes United Kingdom leave European Union but it has
to stay within EU’s custom union and single market norms. Britain will not get
a say in formulating the trade norms and policies and has to adhere to the ones
created by EU. The soft version of Brexit is still a better alternative than a
no-deal Brexit since the latter is expected to devastate jobs, adversely impact
tens of thousands of people and cause a serious economic disruption.
The idea for Brexit
started three years back when EU failed to address the wider economic problems
plaguing Europe; For instance, 20 percent rising unemployment in Southern
Europe. The alternatives formulated were sheer disaster. The real problem
started when EU started throwing trade barriers which caused United Kingdom a
discomfort. This led to UK to consider the decision of leaving the EU and
formulating its own trade policy. As I mentioned, I won’t delve into the
political happenings of the topic, however the decision did cause some impact
on corporate environment in UK.
To understand this
better, I took the help of a Decision
Maker Panel(DMP), which is a survey initiated by Bank of England in
collaboration with University of Nottingham and Stanford University. The respondents
of the survey are 7,500 business executives in UK who helm the small, medium
& large enterprises. The survey mainly covers operational aspects of a
business, possible effect of Brexit on generating revenues, impact on prices,
investment philosophies and employment numbers.
Figure 1: Brexit as a source of uncertainty (Source: Bank
of England)
As per Figure 1, it is
evident that close to 32 percent of respondents view Brexit as one of top
sources of uncertainty and 37 percent view it as one of many sources in
November 2018. 17 percent respondents feel Brexit as the largest source of uncertainty.
These numbers fluctuate through different time periods but latest data reveals
an impending risk. This uncertainty can very well set its footprints on
investments in UK as you observe greater risk averseness. More statistical scrutiny
on DMP data revealed alarming umbers suggesting 6 percent reduction in
investment, 1.5 percent lower employment and productivity collapsing to 50
percent.
To look at the future
investment environment of UK, it is imperative to consider European Structural
Investment. European Structural Investment (ESI) Program was an EU initiative
which was swept under the carpet when 2016 referendum was discussed. 2.5
billion euro was infused by ESI fund on average from 2014 to 2016 as per
Government numbers. These funds support the SMEs and provide the requisite
funding to support operational efficiency and foster innovation in business
environment. The infusion of these funds creates a sense of confidence among
the budding angel investors for investing in young companies. In wake of
referendum, EIS froze this cash and the companies have to look in different
direction for funds. Apart from lack of funding, the export industry could potentially
be hit due to the departure from the European Union. Britain has free trade with members of the
European Union; however, when exporting in the future, British producers may be
subjected to tariffs. These tariffs will unavoidably push prices higher.
UK is a financial
epicentre of the world and to help businesses flourish on British soil, political
decisions should be influenced by a strong forward-planning taking into view
financial and business repercussions of Brexit. I strongly feel UK financial
markets should keep building and innovating to support the global economy and
be resilient to the outside shocks.
