As we get closer to the EU Referendum in the UK which takes place on June 23, the nation is still seemingly on a knife edge as to whether or not it will make the so-called “Brexit” and leave the EU. The country remains in flux until the vote as businesses and their employees alike wait for the outcome before committing to any real long-term plans.
Yet one thing’s for sure and it’s ironic: no one is certain of the outcome or the impact of either result. If you’re a business operating in, or trading with the UK, there are countless issues that affect Anglo-Australian relations. While the ‘Remain’ vote is looking more likely, an outcome of ‘Leave’ is still a real possibility, so many are looking at the potential impact of a Brexit.
Immediate Brexit concerns and impacts: our take
If the referendum triumphs and the UK decides to leave the EU, we believe that the results could create a genuine environment of political and economic uncertainty – for the UK and all of its key trading partners like Australia.
The UK has experienced 13 consecutive quarters of growth (GDP), but this slowed most recently to just 0.4%, in line with economists’ expectations. The Office for National Statistics claimed that the service industry continued to underpin growth, but with much of this depending on maintaining the status quo currently offered by remaining in the EU, many believe that a Brexit could walk the UK into recession.
The UK Treasury, itself campaigning for the ‘Remain’ stance, claims that a ‘Leave’ vote would result in an “immediate and profound” economic shock, forcing growth between 3% and 6% lower. Furthermore, in the worst case scenario, GDP would be 6% lower after just two years, claiming 820,000 jobs, dropping take-home pay by 4% and forcing house prices down by 18%. The pound sterling, meanwhile, could be up to 15% lower.
As investors look to other markets, the team at World First predicts that investors would rush to the US dollar (and, to a lesser extent, the Japanese yen) as a haven currency; the euro and pound sterling could be devalued by a quick 10%. In fact, the concerns over the future vote has resulted in a strong movement towards the US dollar – and the GBP has already been falling.
The AUD reaction to a Brexit
We believe the AUD could be hit quite hard on the back of USD appreciation and a tumbling appetite for risk. Global trade will be expected to slow, reducing demand for Australian commodities, while international monetary policy would also likely tighten.
The bottom line
- A combination of the Brexit vote and a potential U.S. rate rise occurring in June has caused a perfect storm, which will result in further volatility for the Aussie dollar. This turbulent month comes on the back of the RBA’s decision to drop the cash rate in May to record lows of 1.75%, which caused further weakness to the Aussie.
- Both ‘Remain’ and ‘Leave’ outcomes hold significant uncertainties for the UK in Europe, the pound and the global economy, but based on the facts seen so far, we believe that the ‘Leave’ option holds more sizable economic risks.
- The pound is likely to rebound slightly in the event of a ‘Remain’ vote, but a strong turnout at the polling booths, vote win margin and economic resilience hold the key to how long and durable any recovery may be.
In times of such uncertainty, we advise both individuals and businesses to speak to a currency specialist like World First. It is important to gain a better understanding of the risks and discuss how you can mitigate and limit your exposure.