As the surprise result of the EU Referendum in favour of Leave was announced, the financial markets illustrated rapidly the turbulence that could lie ahead for the world’s fifth biggest economy.
The pound immediately collapsed spectacularly to its lowest level against the dollar since 1985. As British financial leaders sought to reassure nervous financial markets, the pound did start slowly to bounce back, an ongoing trend which continued after the weekend. Amidst the economic (and political) change sweeping the Continent, International Monetary Fund Director Christine Lagarde called upon both Britain and Europe to work together in cooperation to ensure that any withdrawal will occur smoothly.
Intentionally for the British no negotiations will start immediately – much to the anger of EU and European leaders. This allows for a ‘breathing space’ for both the economic and political arenas. The very many political uncertainties linked to any withdrawal process are also set to impact Britain’s upon economy (and indeed the greater European economy) in the medium to long-term, according to many economic experts. Prior to the Referendum, and his subsequent resignation as Prime Minister, David Cameron had warned that it could take over a decade to completely withdraw from the trading bloc, and to negotiate any new international trade deals.In addition to that, the World Trade Organisation has warned and predicted that British exporters risk an extra £5.6bn ($8.2bn, €7.2bn) in additional annual customs duties after leaving the reading bloc.
With all parties stressing that it is currently ”business as usual”, it is unlikely that these tariffs and duties will be implemented any time soon. Both the British and European banking and manufacturing sectors (noteably the car manufacturing industry in Germany) have made it quite clear that many jobs would have to be relocated from Britain to Europe as a result of the vote. Indeed, American investment banking giant JPMorgan Chase was the first financial institution to directly warn that it could very likely relocate British jobs abroad in reaction to the Leave vote. JPMorgan currently employs 16,000 people in Britain; Chairman & Chief Executive Jamie Dimon has previously said that nearly 4,000 jobs could move out of Britain.
It is not just finance and manufacturing that will be negatively impacted upon – the energy sector, amidst other areas, will suffer in the short term as well. With oil prices already troubled, the Leave vote will not improve the energy sector.
Both the Petrol Retailers Association (PRA) and the AA initially warned motorists to expect a 2p to 3p increase in fuel prices fairly soon. The first weekend saw only a very slight rise in petrol prices overall. On the oil markets, oil prices fell on the Friday. Brent crude ended up falling, to trade at $48.30 a barrel. The U.S. counterpart, West Texas Intermediate, also dropped 5% to $47.57 a barrel. Many oil analysts and traders were in agreement, though, that the decline in oil prices was likely to be mostly short term. With the Pound Sterling falling against the U.S. Dollar, most oil prices were expected to fall slightly in any event, with a strong dollar tending to suppress oil prices. This is because oil is traditionally priced in dollars, and a stronger dollar makes oil that more expensive for holders of foreign currencies.
In the more longer term, great uncertainty hangs over the British oil and gas sector, which was already seeing market challenges. There is no clear indication as of yet of what sort of trade deals the UK will now be able to establish with the EU. One unattractive possibility is the loss of free movement of people between the EU and the UK. Without that free movement of labour, companies could see increasing labour costs, and more bureaucracy – this at a time when the sector overall is trying to minimise expenses and reduce operating costs.
Similar uncertainty is at work for the nuclear power industry – specifically Hinckley Point. French energy giant EDF has yet to finalise proposals to develop and build, with foreign and domestic assistance, the next generation of nuclear power plants. however, following the Leave vote, the two planned power plants could be put on hold by EDF, or even cancelled.
What will happen regarding Hinckley Point remains to be seen – just as the long term result of the Out vote on the fortunes of the troubled oil and gas sector also remain to be seen.
Rest assured, following the Leave vote there will be great change economically, both good and bad – and not just for the energy sector.