Brexit is impacting the UK economy in ways few had expected. Here are seven ways Brexit is affecting the British economy, British companies, and ultimately investors in the stock market.
1) First of all there is the profound currency markets instability which has taken hold since the referendum's outcome became known: with the value of pound sterling slumping to historic lows against the dollar and Euro before a partial recovery, the majority of British companies except exporters have suffered the consequences, including exporters who have to import the majority of their raw materials. This can be seen in the losses incurred by the FTSE 250 index, which tracks listed companies focusing on the British internal market rather than the more internationally minded FTSE 100.
2) City fund managers have reported that the City is “stunned” by the result, not really knowing where to go as a consequence, and that brexit's outcomes for the UK's financial markets will be “horrible”. Considering finance and investment are still the country's leading economic sector, the whole economy is set to suffer as a result.
3) Negative future prospects for British business: The UK's credit rating has been cut and/or put on negative outlook by credit rating agencies, and in addition there are widespread fears among most economic observers that Britain will enter a recession. Business confidence has already slumped, with many businesses cutting their forecasts and freezing hiring.
4) There are also fears that a new financial crisis is just ahead, following the commercial property fund closures reported earlier this month. In a chilling coincidence, the sectors which according to observers are the most likely to be the hardest hit by the brexit crisis – namely, property, construction and finance - were also the main victims of the credit crunch from 2007-2008.
5) Accordingly, the government is expected to include fresh rounds of fiscal tightening, shortly after the chancellor of the exchequer had announced following the referendum that the government had abandoned the objective of eliminating the budget deficit by 2020. This means the UK will be saddled with even more public debt for the foreseeable post-brexit future, and the five year austerity programme introduced in 2010 will have been a futile exercise.
6) The repercussions for EU-facing businesses: the ability of companies to attract EU and international talent is under strain, as brexit is introducing lots of uncertainty regarding freedom of movement. It is worth noting that this point is valid for private companies but also in the public sphere, as the NHS' hiring processes of doctors and nurses has also been affected.
7) London would use its place as the leading European financial centre, as major investment banks and other financial institutions would have to relocate staff to other cities in the EU if they lost access to the “passporting” system which lets banks operate freely between EU member states borders.
Taken together, these seven outcomes could lead to many listed companies' revenues taking a dent in the next financial year, with falling profits and the consequent loss in financial stability making them a riskier investment option. With the current climate of uncertainty, it is also likely that IPOs and M&A activity will be subdued.