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How Will the UK Economy be Affected by Brexit?

How Will the UK Economy be Affected by Brexit?

However you voted in the referendum, there is one thing that we all have in common; we don’t quite know what’s going to happen, or how our economy will be affected by leaving the European Union.

This has never been done, we’ve never been in this situation, and there aren’t even any formal guidelines in place for exiting the EU. It turns out there’s a lot to be addressed during the forthcoming two year period prompted when Lisbon Treaty Article 50 is triggered, and until then, the effects of Brexit are very much in the realms of speculation. However, it’s important for us to be prepared for these potential changes, and ensure that we’re ready for whatever the outcome may be. So how could the economy change?

What the ‘Remain’ Camp Are Saying

The ‘remainers’ have been very vocal in stating the ways in which the UK economy will dissolve without the support of the EU, and the trade agreements that are in place that give us access to the single market. Prior to the referendum, it was anticipated that the value of the pound would drop, and so far this has been spot on. On Friday, sterling dropped to its lowest level since 1985, and there are concerns that the banks could hike interest rates to stabilise the value, sparking a question: What then happens to British businesses - particularly startups - who rely on loans to fund future development?

The EU currently counts for more than half of all UK trade, which suggests that limitations in accessing the single market could reduce imports and exports, leading to losses and, ultimately, another recession. As we’ve seen from the 2007 financial crisis, a damaged economy is difficult to come back from. Some are estimating that the British economy could shrink by as much as 3 percent over the next few years.

And it’s not just about money, either. How about skills? Reports show that around 1 in 10 employees in the UK were not born in Britain, and, of course, these aren’t only unskilled workers. Consider that 35 percent of qualified doctors in the UK are foreign-born; these are skilled individuals who can’t necessarily be easily replaced by a native Brit. Cracking down on EU immigration is likely to cause havoc within many industries. How will we ensure progress in these areas by closing our borders to those we need?

Could Brexit Benefit the Economy?

We all know that there are always two sides to every story, so what happens when we flip the coin? Could Brexit actually benefit the UK economy? At this point in time, anything is possible. Ultimately, one of the most important things we can take away from the days since the announcement is that everything we’ve seen so far - including the drop in value of GBP against the euro and the dollar - is part of the shockwave.

Yes, the value of the pound has dropped, but this was to be expected, because the future is uncertain. Right now, it’s more about perceived risk than the actual effects of Brexit; remember, we haven’t actually left the EU yet. Even the experts are speaking out and saying we might be blowing things out of proportion. ‘Drops in the Pound and global stock market were severe, but not cataclysmic’, says Greg Ip of the Wall Street Journal. These initial shockwaves are to be expected at a time such as this.

Will things get worse before they get better? Quite possibly. John Van Reenan of the London School of Economics calls it the ‘rabbit-in-headlights’ effect; quite simply, businesses just don’t know what to do. During such a period of uncertainty, they’re understandably reluctant to take on growth opportunities, which could make it appear as if Brexit is having a negative effect in the short term.

If it’s possible that Brexit could have a negative impact on the economy, then it’s possible it could have a positive effect, too. ‘In the long term, Brexit will herald a major growth-boosting period’, says Patrick Minford of the Cardiff Business School. Why? Because we’ll no longer be governed by EU trade regulations. The potential advantage of breaking free is the possibility of new trade agreements across Asia, the Americas, and Australasia. An important question to ask is whether we’ve been playing it safe when it comes to trade, and relying too heavily upon the European single market, rather than exploring.

Thinking About the Future

So what should we be doing right now to help protect the economy? Well, even though we don’t know what’s going to happen in the future, there are ways that we can start planning, to ensure we’re prepared to ride the waves. Businesses should start thinking about ‘future-proofing’; locking in currency exchange rates with forward contracts if they make regular overseas payments, such as to clients, suppliers, or employees, for example, or simply by being a little more careful with their outgoings.

At The Money Cloud, we’ll always find you the best foreign exchange rates. We’ll scour our extensive network of FX professional,s to help you do everything you can to look after your business during this time.


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