Although Brexit was voted on months ago, the talks about putting the move into action are ramping up and having strong effects on the global economy for both traders and consumers.
UK Prime Minister Theresa May recently spoke openly about Britain’s plans for leaving; her comments led many commentators to talk about the impending “hard” Brexit. In this scenario, Britain will use stricter controls on EU immigration; Britain will leave single market, meaning it can’t access free trade for goods or services because of its stance on immigration; and trade barriers will likely go into effect between Britain and the EU. The hard Brexit goes against what many experts think would be better for Britain and the global economy—a softer departure and continuation of many of the current free trade and financial agreements between the U.K. and the EU. May’s recent remarks have already had an affect on global trade, and things could continue to change as discussions increase.
Pound Hits Record Low
The pound has been holding a steady value when compared to the U.S. dollar at around $1.30 since the Brexit vote. But as Brexit talks ramped up and investors started dumping the pound in fear of what the British economy will look like after it leaves the EU, the pound has fallen dramatically. The price dropped down to $1.21 this week, the lowest it has been in 31 years. Overall, the pound has dropped 18% from where it was before the referendum passed. The recent “two-minute flash crash” also plummeted the pound to $1.18 in Asian markets. Gold prices, which surged after the Brexit vote, have tumbled after the recent hard Brexit talks, likely reflecting the sense of foreboding many traders feel about the situation.
Why does this matter? Imports into the U.K. are much larger than exports out, which means the country isn’t as effective in global trade and import costs are rising. Even a slight drop in value raises the cost of everyday items. In fact, supermarket leader Tesco recently pulled Ben & Jerry’s ice cream and Marmite spread from its stores after a clash with Unilever over who is responsible for covering the cost of the weakened currency—the supplier or the customers. If the pound continues to lose value, we could see similar discussions between other global companies.
However, the devaluation could be good news for U.K. exporters, some of which are finding more success now that their goods are cheaper overseas. A lower pound also tends to lead to increased tourism spending.
How to Trade After Brexit?
There’s no doubt that the U.K. and EU economies are currently tumultuous and face unknown futures. Stocks dropped steeply after the initial Brexit vote, but the FTSE 100 and the FTSE 250 indexes are both trading higher now than they were before the vote was passed. Recent talks of a hard Brexit further stoked the market, with the FTSE 100 surging 2% overnight this week to a record high of 7119 due to the depreciated pound making U.K. exports more competitive. Although the market is still fluid around Brexit, the stocks themselves seem to still be successful.
However, as a whole, things are shaking and in constant flux. Britain lost its AAA credit ranking, which raises the cost of government borrowing. To stimulate investment, the Bank of England is cutting interest rates from 0.5% to 0.25%, its first cut since 2009 and a record low. The idea is that a lower interest rate will help the U.K. avoid a recession.
London, the European headquarters for many major banks, investment firms, and companies, is in danger of a total upheaval. London has long been the world capital of foreign exchange trading and the world’s top banking center, with financial, legal, and consulting revenue making up 12% of the U.K.’s gross domestic product. However, increased trade regulations and financial disconnect between the U.K. and the EU after Brexit could make it increasingly difficult to conduct business out of London, which could (and already has) cause numerous bankers and companies to move elsewhere.
The unprecedented vote around Brexit has definitely brought uncertain economic times, and things don’t look like they will slow down anytime soon. The U.K. plans to use Article 50 of the Lisbon Treaty, which gives the U.K. and the EU two years to agree to terms. If that pans out on schedule, the U.K. could be officially out of the EU by mid 2019. The economy could change wildly in those two-plus years, leading to more change and potential economic unrest in the area.