Brexit Damage Control: The Best-Case Scenario for Britain’s Economy

03.18.18
Duncan Hull/Flickr
World News /18 Mar 2018
03.18.18

Brexit Damage Control: The Best-Case Scenario for Britain’s Economy

Brexit has come to pass and now the UK is on its own. There are tighter regulations when it comes to import and export. In short, there are trade barriers between the UK and other European Nations in the EU. This can only mean disaster for the UK economy as free trade is no longer an option for them. There are a few scenarios that will come out of this. It will affect Britain politically, socially, and economically. In the economic aspect, the UK’s economy will take a nosedive and this alarm was raised by economists before they voted to get out of the EU in June.

Weakening of the local currency: When matched against the USD, the sterling pound is weakening. This was expected with the exit as the costs of imports were set to increase. Because of the fact that Britain chose to get out of the EU, trade barriers will be initiated. This means that in order to import from other European countries, Brits will have to pay more including the many tariffs across the border. This will weaken the pound against the USD in the global market.

Dumping of UK shares and bonds: Dumping is simply selling UK assets in large numbers. Since the news was out that Britain has voted to leave the EU, the UK was no longer considered as the best place to invest. It was no longer the crown jewel for the investor to invest in shares, bonds, and other assets. In a nutshell, it was a high-risk region and thus the urge to dump all its assets and invest elsewhere emerged. This could reinforce a negative attitude by investors who wanted to set up their businesses in the UK as they will look for more business-friendly regions outside the UK now.

Decline in the economy of the UK: The economy is expected to drop due to such a move. This will continue until 2020 when it is expected to stabilize. When people are no longer certain of the direction the economy is going, they will refrain from spending as usual. The ripple effect will negatively impact firms in the UK which will lead to a lower GDP and thus a drop in the economy. Brexit will affect the health sector, education, and the financial industry, just to mention a few, in a negative way.

Rise in the level of unemployment: There will be no free movement of labor due to the labor regulations as a result of the exit. This will put the economy in a bad position as UK firms have to settle for the available workforce within the UK. Initially, there was free movement of persons within Europe to seek better employment. Firms in the UK enjoyed cheap labor from professionals with the skills they were looking for which made them more productive. This has, however, changed thanks to Brexit. Firms are expected to feel that pressure which will lead to a drop in production and thus high layoff of workers. Due to the poor economy, unemployment will hit the UK since some firms will close or relocate, while others will reduce their production capacity.

The cost of borrowing will rise: Due to the high-risk nature of the UK in terms of doing business, the cost of credit will go up. Businesses will not have a friendly atmosphere in which to thrive due to the limited market share. This may spiral into a recession and unemployment as firms will not be able to sustain the same number of employees as before. The yield on government bonds will, however, increase as it will be considered a high risk and thus not attractive.

Car industry may flourish in the UK: Initially, before the exit, car dealers and manufacturers in the UK had to compete with other foreign brands within Europe. However, with the recent exit from the EU, the UK car industry may flourish as competition has been cut off. It will not be easy for an international car company like Volkswagen to sell cars in the UK. This means that the local car industry will have a field day as a ready market in the UK will be at their disposal.

The telecommunication industry will not be that much affected: The telecommunication industry will be one of the few industries which will not be that affected by the Brexit. However, roaming charges for telecommunication services will be higher for a non-EU region. The best way to handle this is to enter negotiations in an effort to lower or eliminate roaming charges.

It will take time for Britain to stabilize its economy now that things have been set in motion. In the meantime, Britain can only cope and hope that the dark cloud fades away sooner rather than later.

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