On the afternoon of Friday 24 June, Britain shocked the world by voting to leave the European Union. It was a decision which sent the global markets into turmoil, forced the resignation of a Prime Minister and overshadowed the contentiously close Australian federal election in the local media.
The United Kingdom voted to leave the EU, 52% to 48%, in the highest voter turnout in a UK-wide vote since the 1992 federal election.
Within 10 minutes of the results being announced, the FTSE 100 plunged nearly 500 points, wiping £124 billion off London’s top stock exchange. Within hours, former Prime Minister David Cameron announced his resignation, and the pound tumbled to its lowest level against the dollar since 1985.
But as the dust settles – the pound sterling and FTSE have already begun to recover and Britain has announced a new Prime Minister – one big question remains: what does a future with a Brexit look like, how will it affect the Australian economy, and more specifically, how will it affect brokers?
Answering these questions begins by examining the steps that will now unfold as the UK embarks on its exit from the EU. The UK has held a referendum, but that is only the beginning. As ING Direct
head of treasury, Michael Witts
told Australian Broker
, it is going to be a marathon.
“Brexit could be looked at as a marathon and to be perfectly honest, they haven’t even gone 100 metres…
“Putting it very bluntly, no-one has been here before and there is no play book to go back to and say: well after you’ve done [the first step] you do [the second step] and so on. They will be writing the book as they go and they will invariably hit obstacles as they go.”
The first obstacle will be invoking Article 50.
Article 50, or The Lisbon Treaty, is an agreement signed by the heads of state and governments of countries that are EU members to make the EU “more democratic, more transparent and more efficient”. Article 50 needs to be formally triggered by the UK, which will mark a two year-countdown to Britain leaving the EU. In that time, the UK will need to hold lengthy talks to renegotiate EU agreements and build new trade links with Europe and the rest of the world.
However, as Witts pointed out, invoking it will not be simple. The article has only been in force since late 2009 and it hasn't been tested yet, so no-one really knows how the Brexit process will work.
“It’s not an easy task,” he told Australian Broker
. The policy makers in the EU, Witts said, will have to walk a fine line between minimising the impact but not incentivising further exits.
“If you look around Europe, there are various nationalist groups arguing that the European Union experiment has failed. This is why I say the politicians need to try and keep the lid on the impact.
“You could see this [the Brexit] give rise to more nationalistic-type debates in Europe and that is where the terms upon the exit of Britain from the EU need to be dealt with very carefully.
“If they make it penal – i.e. Britain is in a recession for the next 50 years – then it means the EU is staying together by virtue of threat, rather than by desire and there is no benefit in it. That is part of the socio-economic political framework that needs to be taken into consideration.”
Hardly an economic event
With this backdrop of uncertainty in mind, it becomes increasingly difficult to determine precisely what a future with a Brexit looks like. However, this uncertainty may not be too much of a concern to the global or Australian economies.
While the Brexit vote prompted NAB to cut its UK growth forecasts – from around 2% to 1% – the major bank also noted that as the UK is only 2.4% of the world economy, it is not enough on its own to impact global growth by much.
In a research note, NAB said that ongoing global financial market volatility or concern that other countries could exit the EU or Euro-zone are needed to produce a significant dent in the 3% pace of global growth.
When it comes to the Australian economy, the impact seems just as insignificant. Although one in 20 Australians were born in the UK, the two economies have pursued very different regional economic strategies in the past 50 years, with the UK economy integrating into the European Union and Australia integrating ever closer with its Asia-Pacific neighbours. The outcome, NAB said, is that goods trade between Australia and the UK is less than 2% of each country’s merchandise earnings.
In a worst-case scenario offered by Witts, he said Australia’s labour market could be affected if the negotiations after Article 50 is invoked, go south.
“… British policy makers and European policy makers will be trying to keep a lid on this and restrict it to a Northern European issue. But if they get that wrong and it turns out to be a global impact … then you could see a knock-on effect in terms of the employment market in Australia which would have an impact on the labour market over here.”
However, Witts aptly summed it up to Australian Broker
when he said: “Australia is sufficiently far enough from the UK not to have an impact.”
This “keep calm” sentiment was also expressed by the Reserve Bank of Australia, when it allayed fears of monetary policy turbulence resulting from the Brexit in the minutes of its monetary policy meeting in July.
“The United Kingdom's vote to leave the European Union had led to considerable financial market volatility, which had since settled,” the central bank noted.
“In the absence of significant financial dislocation, the staff's central case was that this uncertainty was expected to have only a modest adverse effect on global economic activity.”
A boost for housing
Where the Brexit could have an effect in Australia, however, is on the housing market and the nation’s foreign investors – which will undoubtedly affect mortgage brokers.
According to research from Macquarie economic analyst, James McIntyre, the UK’s decision to leave the EU will actually boost population and drive up housing demand.
“A weaker growth outlook for the UK, and Europe, could see a return of Australian expats, and a decline in the number of Australians seeking better opportunities offshore,” McIntyre said.
This is welcome news to brokers, as a population drive could provide more buyers to purchase the often-deemed ‘oversupply’ of new apartments that are coming onto the market.
“The return of some of these Australians to home shores is expected to have a positive impact on the Australian population, which has been at almost its lowest level of growth for a decade,” mortgage aggregator eChoice
This – coupled with the monetary policy easing cycle and house price falls – will actually increase confidence in the housing market, the aggregator said.
“There is also talk that another official rate cut is imminent in Australia. This decrease in the cash rate will provide further support to the Australian housing market, which is anticipated to have a 7.5% price drop over the coming 12-months.
“Furthermore, homes price falls in Australia are predominately a result of a 4-year price explosion, with the market now returning to far more realistic levels. The oversupply of new homes is also said to be a contributing factor to price decreases.
“Therefore, stronger population growth as a result of the Brexit, further rate cuts and housing price falls may all boost housing demand and abate any negative sentiment towards a housing glut.”