How Brexit is going to impact UK's economy and its trade relations with the world

24th Jun 2016
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The pot that has been boiling for months has finally spilled over. The Brexit—a portmanteau of 'Britain' and 'exit'—agenda wins, as Britain votes to leave the European Union. The United Kingdom’s membership into the EU has been a topic of debate since 1973.

This is the second time that the British electorate has been asked to vote on Brexit or Bremain (Britain to remain in the EU). The first referendum was held in 1975, where over 65 percent of the voters approved of a continued membership. This time around, the vote has favoured an exit.

Following Brexit, David Cameron resigned as Prime Minister, and reports suggest that the cabinet will again meet on Monday and create a plan for his stepping down. Cameron was believed to have warned that the world will be a less safe place if Brexit happened.

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Image Credit: Knowledgewharton

What are the two parties saying?

Brexit supporters state that members of the EU undermine national sovereignty and those against Brexit state that any perceived loss of sovereignty is compensated by the superior benefits of the membership.

Supporters claim that it will give UK better control over immigration, reduce the pressures on jobs, housing, and public services and possibly save billions of pounds of EU membership fees.

They add that it will allow the UK to make its own trade deals and free the country from bureaucracy. The opposing views argue that this will risk UK’s prosperity, cause trade barriers between UK and EU, reduce access to common European criminal databases, thereby jeopardising national security, and even reduce the influence that UK has over world affairs. They contest that it will lead to several delays in investments into the UK, risk businesses and even lead to loss of jobs.

The key impacts of the Brexit:

On financial markets

Meraj Alam, Co-founder, Earlsfield Fund, London, says that the Brexit is going to have a strong effect on the financial markets.

“There is going to be domino effect of how things are going to function and operate. There are many things that you won’t be able to do with the Brexit. There was one policy with a freedom to operate, many will have to realign their strategies.” he adds.

As a result of the Brexit, the pound value has dropped by a staggering 11 percent, causing a domino effect of pushing down the stock markets in Asia. The value of the pound was traded at $1.36, its lowest in three decades.

The Bombay Stock Exchange (BSE) is trading lower by 964.80 points or 3.57 percent, to 26,037.42, and Nifty falls at 306 points or 3.70 percent to 7,974 points. The Singapore dollar has dropped and is believed to be heading to its biggest dip in the last four years.

Impact on investments

The London-based Earlsfield Fund, which looks at investing in Indian startups, believes that the Brexit will make investments and inflex of funds difficult. Meraj adds that as a fund that dealt with investors not only from the UK but from all across Europe, being a part of the EU gave Earlsfield access to several benefits like trade and free travel. But with this shift, there are going to be several changes and setbacks.

“We will have to see how things are going to progress- being an independent nation with its own policy, in the coming weeks there are going to be several large and small companies that have to accommodate for the change that is happening,” says Meraj.

Zoopla's Chief Executive Alex Chesterman, fashion designer Anya Hindmarch,, Travelex Founder Lloyd Dorfman, Skype Founder Niklas Zennstrom, Founders of Yo!, Sushi Mattias Ljungman and Simon Woodroffe, told in The Guardian  that UK has been the best place in Europe to launch and grow a business. They state that leaving the EU will undermine the ability of Britain’s entrepreneurs to start up, grow and innovate.

A survey by GP Bullhound suggests that Britain today has the highest number of unicorns in Europe, a total of 18 out of 47.

Impact on startups and tech hires

Brent Hoberman, Co-founder of Lastminute, told Forbes that London is a talent magnet, and Brexit will hurt the confidence of entrepreneurs across the world in testing London as a market. Damian Kimmelman, Founder DueDil, adds that the impact of Brexit will also effect startup hires as without the access to Europe the pool of applicants will dramatically drop.

He told Forbes that being a venture-backed business they are invested in super growth, but that cannot be created if it would be difficult to hire people that can create that growth.

Also finding people in tech will become difficult. Over a quarter of the employee workforce in most startup offices in UK and London are migrants. There also is a huge pool of migrant entrepreneurs, like Brent.

One of the biggest disadvantages for tech startups, according to Labour Party politician Tessa Jowell is losing out on a single massive digital market.

Impact on scientific research

A report by The Guardian suggests that UK has close to 3.3 percent of the world’s scientific researchers, who are believed to produce close to 6.9 percent of the global scientific output. The EU currently is the leader in terms of the share of science researchers, with 22.2 percent, followed by China at 19.1 percent, and US at 16.7 percent. In fact, UK has been the largest recipient of research funding in EU, at 15.4 percent.

Impact on India

NASSCOM has stated that Brexit is likely to cause a huge negative impact on the $108-billion IT segment of India. A report by Deloitte also suggests that India is the third largest source of Foreign Direct Investment (FDI) to UK and the sectors include food and drink, healthcare and agritech. It added that India’s largest G20 investor is UK. Close to 800 Indian-owned business in the UK, including biggies like Tata Motors, employ 1,10,000 people.

In an IANS report, Chandrajit Banerjee, Director General of CII, said that most Indian companies choose UK because of the easy access it provided to the European markets. The Brexit will, therefore, have an impact on future investment and expansion decisions. Deloitte reports also suggested that several foreign funds may choose to move out of India as the movement of funds gets impeded.

Conclusion

While it is too early to comment on how long and deep the impact of the Brexit is going to be, many experts believe that the move will not only affect the British economy but also the global economy.

With the Brexit, there is pressure on UK to activate Article 50 of EU and begin exit negotiations. This means that there will be close to a two-year process where the terms of exit will be negotiated between all 27 counterparts of Britain, and each is said to have a veto over the conditions. The impact is going to be gradual and long-lasting, also affecting trade relations Britain has with other countries.

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