BREXIT and Its Effect on Australia

BRITAIN’S shock referendum decision to quit the European Union has unleashed a wave of global jitters. Markets of all sorts — stocks, futures, oil, butter — want certainty, and the Brits have removed that by a tiny majority of votes. Britain is only a minor player in our trade as we concentrate on the Asia-Pacific region and giants such as China, Japan, South Korea and India. But the flow-on effect of its withdrawal from the EU, and the wait while it renegotiates its trade agreements with Europe, will be felt everywhere. As one Australian economist put it today, this could be a further headwind to growth.

The long-term effects of Brexit are uncertain. Much will depend on the negotiations between the EU and UK surrounding the conditions of exit. This could take years. Since around half of UK trade is with the EU, it is likely that the government will seek to follow the example of Norway and Switzerland in retaining the benefits of a free trade zone without EU membership – however this is far from guaranteed. The Norwegian Prime Minister Erna Solberg suggested that “Britons won’t like this” since “Brussels will decide without the Brits being able to participate in the decision-making”.

Crucially, this uncertainty will mean that business decisions are deferred and investment delayed. This may result in many firms deciding to take their operations elsewhere. The Bank of England has suggested that Brexit will stoke inflation and raise unemployment, potentially tipping the UK into recession. Of greater concern are the potentially greater geopolitical risks if other countries follow Britain’s lead and seek to leave the EU. The Euro-sceptic political parties of the far-right have surged in popularity in recent years, and would surely push for their own countries to exit. This could mean a disintegration of the EU.

Now are there any consequences on Australian? As they are closely linked, turmoil on offshore markets will likely have a large impact on Australian markets. Australian stock markets and the Australian dollar tend to decline sharply as uncertainty increases and investors adopt a “risk-off” mentality. Bond yields will also head even lower as investors engage in a “flight to quality”.

If financial markets seize up, as they did in 2008, then the big Australian banks will find it difficult to secure the vast amounts of offshore funding that they require – share prices will fall sharply and government guarantees will be called for again. The one bright spot could be the stock price of gold mining firms if gold surges as a result of its “safe haven” status as it did in 2008. A fall in the pound would have negative consequences for the many Australians who have pensions and other assets in the UK. And the spending power of British tourists (last year more than 700,000 of them arrived in Australia) would be lowered.

In the longer term, it is likely that a shaky global economy will severely impact Australia’s trade. Exports have been a key driver of recent GDP growth and so this could have severe ramifications for employment and economic growth. Recall that commodity prices sank quickly in 2008, and also that the UK is still Australia’s 7th largest trade partner. As with the majority of governments, the lack of desire in promoting structural change means that Australia’s fiscal position provides little comfort in the ability to stimulate growth. A repeat of 2008-09 when Australia avoided recession is unlikely to be avoided.

Despite its distance from Europe, Euro-scepticism can be observed in Australia. For successive right-wing governments in Canberra, the EU is code for protectionism, bureaucracy, secularism and environmentalism – all of which are bad. When former Prime Minister Tony Abbott called for “more Jakarta, less Geneva” in Australian foreign policy this was not merely another signalling of a shift in Australian priorities, but a comment about European political values too.

Such views were not directly linked to the “Brexit” project. They were related to a wider cultural politics of the Right that can also be found among British Eurosceptics. In Australia, these arguments were driven by a rehabilitation of the British Empire as having been a force for good in the world, as a counter to the delegitimizing versions of history brought up by the memory of settler-Indigenous relations. Australia, it is suggested, is preparing for the “Asian century”. But despite the geographical distance and dominant perceptions of immigration from Asia, people-to-people ties between Australia and the UK remain strong. More than one million members of the current Australian population were born in the UK, the leading country of birth for Australia’s overseas-born population. Conversely, approximately 100,000 Australians live in the UK.

With a debt mountain piling up in China even as growth slows, and the developed world struggling to generate growth despite record-low interest rates, the global economy is fragile. Last week, the US Federal Reserve cited the uncertainty around Brexit as one reason for leaving interest rates unchanged. The effect will be most keenly felt in the foreign exchange market. The trade-weighted-index for the British pound has depreciated by 6.5% this year, and currently appears to be moving in step with Brexit polling

Now it is almost certain that Britain will no longer be a part of EU, then what you should do about it? Not surprisingly share markets reacted negatively with all global markets initially falling. The good news is defensive assets like bonds and gold rose. The key is not to fight your emotional reactions if markets are falling. Channel them into positive strategies and actions that will improve your long term returns.

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