Two months on from the landmark referendum vote which saw more than half of the UK voting population vote to leave the EU, we take a look at the effect on the UK economy and market…
Both sides of the EU Referendum campaign offered ‘insights’ into what would come, using doom and gloom prophecies to swing the vote in their favour. From predictions about a return to recession, to a prediction of unprecedented growth, how significant has the impact actually been?
Immediate effects on the UK economy included a dramatic fall in the value of the Pound Sterling, to a level against the US Dollar not seen since the mid-1980s and a stark dip in the FTSE100 and FTSE250 values among other indicators. Since then however, as the instantaneous ripples of the decision fade to a whisper, how has the economy fared?
Value of the Pound
The pound has taken a beating, with the value of Sterling falling against the Dollar and the Euro. In the first day its value dropped by a staggering 13% from $1.50 on 23 June to $1.30 on the 23 July. Since then, its drop has stabilised, with a current trading value of $1.29.
This change in value is not all doom and gloom however. While UK importers are feeling the pinch on their profit margins with many increasing prices to compensate, in reality, the fall in sterling is opening significant export opportunities for the UK, with many businesses profiting from expanding market places, and many viewing export as a new, viable opportunity. This is seeming to offset the immediate impacts of Brexit and shift, rather than damage, UK trading.
It is also worth noting that the diminished value of the pound is making inbound UK investment a covetable opportunity, with the £24billion dollar investment into UK Technology firm ARM holdings, the first major inbound investment since the Brexit Vote. Other industries benefitting from the change include Tourism and Hospitality, with inbound visitor numbers up to the UK, and UK Manufacturing.
FTSE100 and FTSE250
The FTSE100 and FTSE250 is an index of the performance of top businesses. In the immediate aftermath of Brexit, both plummeted in a post-referendum dip, but for the FTSE100 particularly, the dip was short-lived and the index returned to levels not seen since August 2015. In all likelihood, this is because the UK companies which contribute to the index conduct much of their business overseas, with export revenue climbing thanks to the falling value of the pound. The FTSE250, which incorporates more businesses, many of whom are reliant on domestic incomes has seen a significantly slower recovery, although levels have now returned to a rate comparable with last year.
According to the first indicative figures that specifically record changes since the Referendum, the growth in the economy has slowed and stopped and for the first time, figures indicate a small shrink in the UK economy. According to the Markit PMI report, this shrinkage is approximately 0.4%, with the economy contracting at its fastest rate since the beginning of the 2009 recession.
For economic purposes, the generally accepted GDP growth figure affecting insolvencies is 2.2%. If the UK economy grows by more than 2.2% per annum in any one period, then the number of companies going bust, decreases, however if growth remains below 2.2%, then the number of companies going bust will rise. HIS Global Insight revised its UK GDP forecasts after the Brexit vote to 1.5% for 2016 and to 0.2% for 2017, implying a likely increase in the number of insolvencies amongst UK companies. The credit insurer Euler Hermes is predicting a 1% increase in 2016 and 3% in 2017
The Bank of England has now confirmed a cut to interest rates, to 0.25%, encouraging spend in the UK economy and a positive lending environment. It is hoped this move will help to stave off any negative impacts from Brexit, preventing a slide back into recession for the UK economy. The effects of the interest rate change remain to be seen however.
Economic forecasts have been all over the place pre and post the Brexit vote which, for all the analysis probably comes down to “your guess is as good as mine”. The only certain thing is uncertainty. How it affects and is already affecting businesses will depend on who they are, what and how they trade and where their markets are aligned. What is clear is that there is a level of uncertainty, and the full picture is still a little blurry. Current figures are predicting a likely increase in the number of insolvencies over the coming 24 months, so businesses would be prudent to consider credit insurance to protect and futureproof their businesses.