So, the sky hasn’t fallen (yet). Nor has Article 50 been invoked, prompting all sorts of childish behaviour in the European Parliament. Things are getting tetchy. Article 50 is a chunk of legislation, basically allowing, and setting the requirements for, a member state to leave the union. While the creators probably never believed it would be used, an exit strategy is always important to have.
Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.Fair enough, you might say, but why hasn’t the UK started this process? We’ll leave that for another day. Now, it’s time to see what the UK leaving the EU could mean for you and your finances. The murky world of international finance tends to be obscure and hard to understand (deliberately), so we’ll try to explain, in easier terms, how decisions taken on vague and abstract concepts can change how you enjoy your everyday life. From a financial perspective, of course. The sky still hasn’t fallen at time of publishing. We can still enjoy the sky.
UK Loses AAA RatingDoes this mean we all need to buy new batteries for our remote controls? No, there’s always spares in the drawer just below the cutlery. Standard and Poor’s Credit Rating system is what economists and financial bigwigs use to analyse “credit ratings for the debt of public and private companies, and other public borrowers such as governments and governmental entities“. So, as a virtual rap on the knuckles for bad behaviour, a US financial services company has informed the world that the UK is no longer “highly unlikely to be adversely affected by foreseeable events”, but merely “not significantly vulnerable to foreseeable events”. So does this affect most people? Not immediately, but if the trend continues, inward investment can suffer, which in the long term could mean a weaker economy, with all the negatives that brings. It’s not the most relevant piece of information to most people’s daily lives, but from a macro-economic viewpoint, it’s not something to ignore.
Impact on TradeSurely businesses will just keep buying and selling as normal, as hindering this in any way means everybody loses? Well, yes and no. Businesses want to continue as normal, but such is the quagmire of international trade agreements that this may not be as straightforward as it should be. The ominously-titled Global Counsel have produced an excellent analysis of the potential impact of Brexit (view the pdf here). The options available to the UK once they’ve left the EU are laid out plan and simple. Not very interesting stuff, all this tariff nonsense, but what it can mean for the end user (that’s you) is higher prices of anything that needs to be imported, and less demand for exports due to their higher price abroad thanks to these very same tariffs. So a German car may end up being slightly pricier than pre-Brexit. However, German car makers are a large part of the German economy, so wouldn’t it make more sense to agree fair tariffs so their exports remain high? This is the balancing act required, and why the trade side of this whole debacle needs to be sorted out quickly.
Devalued SterlingUntil the price of bread, petrol, quilted toilet paper and chips start to increase, very few people actually notice a decrease in their currency value on a daily basis. It’s been one of the main headlines of the week, so a strangled GBP must mean something for real people. They wouldn’t lie to us, would they? No. It’s very real, and it’s potentially bad too. There are some positives too in the short term, such as exports becoming cheaper for those outside the country (assuming new trade tariffs don’t ruin the difference), but for the citizens of the UK, a strong sterling is the best overall situation. Some potential downsides are:
- Imports are more expensive, as GBP doesn’t get you as many USD or EUR, meaning more expensive BMWs.
- Inflation is likely, as further wage cuts would be deemed political hari-kari, and corporations are just as unlikely to cut their margins and not pass cost increases on to the consumer.