Without question, the results of the recent referendum in Britain shocked financial markets around the world. Needless to say, the results also shocked the experts who prepare investors for such decisions.
Add to that the political uncertainty it created not only in Britain, which eventually named Theresa May as the new prime minister, but in Europe itself, and you have a very fluid situation whose long-term consequences are difficult to anticipate.
For businesses, Peter Hall, chief economist for Export Development Canada (EDC), says there are two major factors to consider: the depreciation of the pound and the economic uncertainty that will affect companies’ investment decisions.
With the depreciation of the pound, there will be a standard-of-living hit for the average Briton.
“If the assets of UK-registered companies are denominated in pounds, their purchasing power internationally has clearly been diluted, depending on their portfolio design and exposures,” Hall said. “The pound is, on balance, a net negative for them. The only positives are that if they’re exporting, they can do that with a 10-per-cent-cheaper pound.”
Given the economic uncertainty of the situation at the moment, businesses that have all of their operations in the UK, or foreign investors with affiliates in the UK, will not likely make permanent investment decisions in the near term, Hall said.
“They’ll wait until they know the framework they’re operating in,” he said. “If all companies are dealing with this, we’re talking about a large amount of potential investment that is in ‘delay’ mode, with a wait-and-see approach.”
Businesses that have already put money down on projects won’t likely terminate them, he said, because there is too much to lose. “But those who haven’t, may,” he added. “It takes a while to catch up, even in a delayed investment situation.”
The impact on Canada
The UK is Canada’s No. 3 customer in terms of merchandise trade, with $15 billion in exporting activity from Canada, accounting for 3.1 per cent of Canada’s total exports. And, there’s trade in services as well – 5.5 per cent of Canada’s total trade in services goes to the UK.
In addition, Canadian companies with boots on the ground in the UK make roughly $30 billion worth of sales annually from those foreign affiliates (2013 data).
When it comes to exporting merchandise, Hall said the depreciation of the pound will affect Canada’s exports to the UK, unless Canadians do some serious price discounting. That said, 62 per cent of what we export across the pond is precious metals, which have seen a price jump as a result of Brexit.
“Not only has the currency changed, but international prices of gold and silver have actually gone up,” Hall said. “So it’s double-trouble for 62 per cent of Canada’s merchandise exports to the UK. And as financial assets remain uncertain, the flight to safe assets will only keep precious metal prices high.”
EDC’s estimates show that by 2017, as a result of Brexit, exports to the UK could experience an 8 per cent hit.
“That’s pretty substantial,” Hall said. “The hit to Canadian exports to the European continent is another 6.6 per cent — so it’s not just a UK effect.”
In addition to having companies that work through foreign affiliates in the UK, there are also Canadian companies that are pulled over to Britain through supply chains.
“We have many foreign affiliates over there and they’re doing a lot business from a UK base. If they’re considering continuing to support and enhance those investments, or if others are being pulled over there through their supply chains, or if there are companies that have been thinking about going to the UK, it’s all up in the air now,” Hall said.
Asked about EDC’s policies vis-à-vis supporting Canadian companies in the UK, Hall said EDC is open to considering all possibilities. He said it is open, for example, to talking to customers whose bases of operation are in the UK, but who are considering moving elsewhere. This also applies for businesses in supply chains as well. He said EDC would even consider supporting Canadian companies that see an opportunity in filling the business void created by others leaving this “very lucrative market.”
When it comes to the UK as a global financial centre, Hall said he believes that financial institutions and the supporting institutional infrastructure are together trying to maintain and even enhance their standing.
Ultimately, he said, no institutions will make immediate decisions while the situation is so fluid, and Canadian businesses have to understand that.
The view from London
Meanwhile, Olga Vovk, EDC Senior Regional Manager for Western Europe based in London, said her team anticipates a slowdown in the UK economy in the near or mid-term.
“Our sense is that London isn’t looking at it as an existential crisis,” Vovk said. “They compare it to other economic downturns, likening it more to the events of Black Monday and 9/11 rather than the 2008–2009 financial crisis.”
She said commercial and residential real estate have both already been affected, but her team gets the sense that the financial community expects London to maintain its status as a global financial centre.
“Although it is expected that European financial hubs such as Paris and Frankfurt may grow in relative importance, London will likely continue to play a leading role, particularly because of its strong linkages to Africa and the Middle East,” she said, and noted that a number of banks have already announced their plans to maintain their headquarters in London.
In short, she said, the feeling she’s observing from EDC customers, the business community and the banks is that for the moment it’s ‘business as usual,’ while they continue to monitor developments closely.
“Although it is still early days, so far we have not seen a substantial number of deals in our pipeline being put on hold,” she said. “Things are largely continuing to move forward as businesses adjust to the new environment.”