In an historic national referendum, the people of the United Kingdom narrowly voted to leave the European Union after long and bitter campaigning by both the Leave and Remain camps. The effects of the vote are being felt already. At the time of writing, the pound is at a thirty-year low against the U.S. dollar, and about $2.25 trillion in wealth has been wiped out from world stock markets while the Bank of England has injected £250 billion to try and stop the bleeding.
But what does the Brexit mean to your business?
Firstly, long-term, we have to wonder whether it’ll actually happen. The referendum results were clear, but its results aren’t binding on Parliament, and the EU cannot force the U.K. out. Only the U.K. itself may invoke Article 50 of the Treaty of Lisbon and begin the two-year process of leaving the EU.
Of course, ignoring the referendum would probably provoke a political crisis and an election, but with Prime Minister David Cameron having announced his imminent resignation, jockeying for his succession already having begun, and the opposition Labour Party undergoing something between a revolt and an internal coup, this seems to be occurring anyway.
Only Parliament may choose to invoke Article 50, not the Prime Minister, and since Members of Parliament voted overwhelmingly to Remain, the government may yet decide to override the direct wishes of the electorate in favour of their ultimate economic interests. I wouldn’t like to give odds on it, but suffice it to say there’s a non-zero chance.
But let’s assume the U.K. leaves the EU. What then?
With the value of the pound dropping rapidly, expect fewer British tourists in Canada as their pounds buy fewer and fewer dollars. The U.K. is the largest source of overseas visits to Ontario, at fourteen per cent of overseas visits. Mind you, eighty-six per cent of all visits are from other Ontario residents, and only two per cent of visitors are from overseas, so the U.K. represented fourteen per cent of two per cent, or 0.3 percent of all visits. Probably not a huge impact, then, and with Niagara so far shaping up to have a significantly larger tourist season than last year (which in turn was above-average), there’s no reason to fear any sort of downturn in our tourist industry.
This summer, the European Council hoped to approve the Canada-European Union Comprehensive Economic and Trade Agreement, better known as CETA. With Brussels likely tied up in negotiations for the Brexit, it’s very likely that approval will be delayed. Further, as a non-EU state, the U.K. would be excluded from the terms of CETA as written, which means Canadian-U.K. trade wouldn’t receive the boost it would have from the deal.
The U.K. was also a major backer of CETA and was instrumental in getting the deal this far. There’s some question over whether CETA would be ratified in Europe without the U.K. as a voting member of the bloc.
After the United States, the EU is Canada’s largest trading partner. CETA would increase the value of that trade by lowering barriers. The U.K. alone is Canada’s fifth-largest trading partner last year, accounting for $24 billion in total trade, with a positive balance of about $7.8 billion. Compare to $56 billion in trade with China, $90 billion in trade with the entire EU, and $750 billion in trade with the United States.
Just so we’re clear, though, we’re not talking about losing trade with the U.K. (trade losses from U.K. economic woes notwithstanding) – just not gaining as much as we might had they remained in the EU and CETA.
An alternative deal could be worked out that includes the EU plus an independent U.K. in CETA. With Canada and the U.K.’s traditionally strong ties, a separate free trade deal between the two countries is also a distinct possibility. However, both of these would take time, probably years, to negotiate.
Uncertainty is wreaking havoc with stock markets right now, but when things get volatile, markets move to the U.S. dollar. This could work out well for Canada – as the loonie gets relatively weaker, Canadian manufacturing and exports get stronger, and right now, Brexit is pushing our currency downwards, which is generally good for business.
So far, most financial experts don’t believe that we’re headed to another 2008-style financial meltdown. With the markets being down, this could actually be a good chance for Canadians with cash on hand and long-term gains in mind to make some smart investments.
The really substantial negative impact on the economy would come if the Brexit proves to have started a domino effect. If other European countries start to desert the Union en masse, spurred by nativist political groups as the Brexit was, then a general European recession could well set in, and with the EU as a whole being the world’s second-largest economy, the effects will be very widely felt.
In short, it’s a time of considerable uncertainty, but unless your business trades directly with the U.K. – and if it does, you probably know more about this issue than I do – there’s no cause for alarm right now. Maybe the falling loonie will make you reconsider your summer vacation to the U.S., but the much-weaker pound might bring you to the U.K. instead.
As they say, stay tuned.