A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd. network

VOL 18, Issue 4 October 2016

BREXIT AND THE FUTURE OF THE WORLD ECONOMY

As the EU discusses and debates the consequences of Brexit, businesses farther afield have shown surprising insight into how the UK’s political future will affect them. With the global economy so deeply intertwined, pulling on one thread always means varied effects elsewhere – but even so, the specific implications for each region of the world are fascinating to explore.

The immediate effects of Brexit were felt primarily in Britain. Its vote of 52% to 48% in favour of the UK leaving the European Union came as a shock to many, not least the British government, which had not made Brexit contingency plans. As a direct result of the vote, Prime Minister David Cameron immediately resigned from his position, while the British currency fell to its lowest rate in three decades.

At present the nature of the exit is yet to be determined, and so it will be some time before the dust truly settles. Negotiations on the UK’s divorce settlement have not yet begun, and cannot begin until the British government triggers Article 50 of the Lisbon treaty, which allows a country to leave the European Union. Once negotiations begin, the UK will have two years to unravel some 80,000 pages of laws binding the UK to the EU. New Prime Minister Theresa May has said that she will trigger Article so by the end of March 2017.

While Brexit is expected to create years of uncertainty in the British economy, businesses elsewhere are already beginning to adapt. The PKF family is represented on 6 continents and has, accordingly, been keeping a close eye on how companies around the world are responding to the news. PKF is the leading global accounting and advisory brand, and we asked some of our member firms for their preliminary insights into how Brexit might play out.

Prior to the vote, Stuart Rogers of PKF Francis Clark in the UK wrote that: ‘the consequences for UK taxation would most likely depend upon the nature of the exit, as there are any number of models (or ‘deals’) that the UK might agree on with the EU as time goes on.’ As the UK exported 44% of its goods to the EU in 2015 and spends £288bn annually importing from EU member countries, the continuation of a harmonious trade relationship is certain to be a priority for both sides.

To that end, there is a push within the EU to maintain the current trade relationship with the UK even after Brexit becomes formalised. Other countries worldwide may well follow suit, as it is in everyone’s interest to bring a measure of normality back to an uncertain climate for trade.

We may find out soon. The UK will need to enter into negotiations for major trade deals with China and India, diversify its international trading relationships and open up new bilateral investment opportunities. If either side is unwilling to make a simple agreement to keep calm and carry on, then many headaches can be expected; FTA negotiations are notoriously lengthy and are unlikely to be resolved until the Brexit is fully complete.

With that in mind, Andrew Jones and Erin Sutton of PKF Corporate Finance in Australia have written that at present the only certainty surrounding Brexit is uncertainty.

Australia is due to enter negotiations with the EU on a free trade agreement in 2017 and the UK is likely to be excluded from these talks. However, moves are already being made to begin FTA talks directly between Canberra and London. There is wide speculation that trade between Commonwealth countries may increase if the EU and other parts of the world reduce their trade with the UK.

Given the unresolved fallout from Brexit, PKF Australia advise their clients that their “best defence against this uncertainty is to have a clearly defined, well-rounded and long-term investment strategy,” featuring a variety of holdings across different assets and regions, at least until the effects of Brexit have been accounted for in the investment world.

PKF Cooper Parry in the UK believe that the current volatility is likely to continue until the market comes to terms with what leaving the EU means for both the UK and the wider global economy. They recommend owning a well-diversified investment portfolio that has exposure to global equities and the emerging markets, as these types of portfolios should be less affected than those containing a bias toward the UK market.

George Mangion of PKF Malta believes that one positive effect of Brexit may be that the UK becomes an attractive option as a tax haven by freeing itself of EU regulation. Mangion has written that the British government will do its best to attract new business by offering exemptions following the devaluation of the pound and a reduction of corporate tax below 12.5%. John Casella of PKF Thailand says that after “over 400 years of cordial business relations, we can expect that the UK’s absence from the EU will see trade with Thailand increase, especially as the EU is refusing to restart negotiations on a long-stalled FTA while Thailand is under military rule.” In Africa and South America, the silver linings have been harder to find. Several currencies have suffered as fragile economies have been rocked by the sudden lack of clarity in their traditionally open trade relationships with the UK. The atmosphere in many areas is reminiscent of a post-earthquake period of damage evaluation.

Slowdowns marked the Brexit vote in more developed economies as well, though to a lesser extent. Even prior to the vote, research by PKF Littlejohn and Capitalise showed that 40% of small business leaders were making decisions based on the possibility of Brexit, with 15% postponing entering new business relationships until there was greater clarity. A more recent study in the USA found that 28 per cent of US mid-sized companies planned to slightly or significantly decrease their investments in the UK following Brexit.

Though we’ll only start to truly understand the longer-term implications of Brexit once Article 50 is triggered and negotiations between the UK and the EU begin in earnest, some takeaways seem clear. Brexit may reduce the cost of doing business in the UK, and a weakened pound may make investing in the UK a more attractive outcome.

The UK’s new freedom to sidestep EU rules on trade is likely to mean a medium-term boost for countries that have been rebuffed by EU trade requirements. Trade may increase in Commonwealth countries, particularly if deals between the UK and the rest of the world aren’t fast-tracked. And the global south is likely to look elsewhere for preferred trade partners, unless and until questions about future trade with the UK receive clear answers.

With all eyes on the UK and Europe, the worldwide implications of Brexit may be less well-known but are no less important in shaping the investment climate of tomorrow. As the leading independent global accounting and advisory brand, the PKF family will continue to work across borders to ensure that our clients get clear, actionable advice and support. Get closer to expert advice; get connected to PKF.

(This article published by PKF International, brings together insights from PKF member firms around the world.)