- The Brexit referendum has already caused trouble for the UK economy with slower growth and a falling pound.
- Fortunately, polls show that the vote will be to stay in the EU.
- Traders might take advantage of the situation as the pound still has lots of ground to recover to pre-Brexit levels.
It seems that Shakespeare is still very popular in the UK as the country is staging a referendum on whether or not to stay in the European Union (British exit = Brexit). This article is going to research if Brexit is just a comedy and much ado about nothing, or if there are some real threats to an exit vote.
The Brexit possibility was born when, in order to get more votes from Euro skeptics, the current UK prime minister David Cameron promised in the last elections that he would stage a referendum on whether the UK should remain in the EU or not if he were to be reelected. At that point is seemed like an innocuous issue, but it has now evolved into something pretty serious as it already has important consequences for the UK economy.
Current Situation and Influence on Markets
The first direct impact of Brexit fears is related to the British pound (GBP), once considered a global currency is currently moving like an emerging market currency.
Figure 1: USD per 1 GBP for the last 5 years. Source: XE.
The GBP declined from a high of 1.71 USD for 1 GBP to the current 1.44 in less than two years. A weaker pound should be good for the economy but that is not how the British economy is set up as it is very oriented to foreign investments. Since the last elections the British GDP has been growing but at a constantly slower rate.
Figure 2: Gross domestic product – quarter on quarter growth. Source: UK Office for National Statistics.
One reason for the slowdown is that the UK is losing some foreign investments as the uncertainty with its political direction grows. This uncertainty quickly affected luxury London real estate, which was for a long time the Mecca for rich global investors that parked their money in expensive London flats but that practice has been fading. But there are several other potential threats to a Brexit than only luxury real estate.
Potential Situation in Case of a Brexit
As the Brexit is a purely political and not so much an economical issue, the consequences of a Brexit could be very detrimental. The issues that ignited the whole situation are, according to the BBC, the following: the ability of immigrants to send child benefits back to their home country, migrant welfare payments, keeping the pound, protection for the City of London as the financial center of the UK, control of their own borders, and savings on EU fees. On the other hand, the reasons for the UK to stay in the EU are the following: easiness to sell things in Europe, young and keen to work immigrants give a boost to the economy, and that the UK status in global politics would be damaged by the UK not being in the EU.
The Bank of England warned that the UK might go straight into a recession if a Brexit is voted in with a depressed pound and a rise in unemployment. The situation on the stock market is not of the rosiest either.
Figure 3: UK FTSE index. Source: Bloomberg.
The UK market chart does not look that bad with a loss of 14% in relation to the April 2015 high but when you add the depreciation of the GBP in relation to the dollar you get to a loss of 22%, and that shows how important it is to stay in EU for the UK. The losses have been larger but both the pound and the FTSE have recovered as Brexit polls indicate a vote to stay in the EU.
The current polls are getting more positive as 46% of UK voters want to stay in the EU.
Figure 4: UK Brexit polls. Source: Financial Times.
Traders might take advantage of the situation as a vote to stay is getting more likely and the pound has still lots of terrain to regain in relation to pre-Brexit levels.
Shakespeare’s comedy Much Ado About Nothing is a perfect match for the explanation of the situation as a Brexit would be detrimental to the UK economy and future growth prospects and is not logical to outside viewers. The world is becoming more of a global market place where historical imperialistic attitudes do not fare well and have terrible results for the economy of an isolated nation. The hope is that the British people understand that and do not vote themselves out of the global economy, focus on real growth and production and leave the political bickering, rumors and intrigues to comedies, like it was the case in Shakespearian times. In the meantime, traders have a good opportunity to make some money by grasping the currency movements related to the referendum.