In a decision that sent shockwaves across world markets, the United Kingdom chose to leave the European Union (EU) in a vote with lasting ramifications. As the world reflects on the results of the vote, it’s important to consider what will happen next and how this decision may impact Canadian businesses.
The official results of the vote were announced on the morning of Friday, June 24. While it was a close race, British citizens ultimately voted to back Brexit - the term used to describe Britain's exit from the EU. In a high turnout referendum vote, the decision to leave the EU won 51.9 per cent to 49.1 per cent.
The morning after the vote, UK Prime Minister David Cameron announced he would resign by October. He also stressed that he will do everything he can to “steady the ship” over the next several months, but that new leadership was needed.
Cameron’s announcement helped momentarily calm turbulent markets and halt a rapidly plunging British pound. However, the change in leadership is not a cure-all, and the Bank of England (BoE) cautioned that there will be a period of uncertainty. The BoE’s governor, Mark Carney, was careful to stress that UK banks are more resilient since the 2008 financial crisis, and that the BoE will implement continuity plans. Carney also pledged to make 250 billion pounds available to banks to help steady volatile post-Brexit markets. As banks grapple with chaotic markets and a weak but recovering pound, uncertainty will be the norm for now.
How Could This Impact Canada?
At this point in time, the details around how Brexit will impact Canada in the long term are speculative in nature. However, experts anticipate the following could occur:
As a result of Brexit, it is likely Canada will lose out on the benefits of the Comprehensive Economic and Trade Agreement (CETA) with the EU. According to Statistics Canada, $16 billion worth of products were exported to the United Kingdom in 2015 - making them Canada’s third largest trading partner. Through CETA, most tariffs on Canadian goods entering Europe were removed. Following Brexit, it is likely Canada will have to negotiate a new, separate deal with the United Kingdom, which experts believe could be a lengthy process.
In the short term, it is likely Canadians will see lower returns on their investments. Canadians invested nearly $69 billion in the United Kingdom in 2014. As markets react to the Brexit vote, it is anticipated that such investments may weaken. However, experts don’t suspect that we are on the verge of long-term financial turmoil and that businesses should see this as a good opportunity to make calculated investments.
•Fluctuating Canadian dollar
Immediately following the Brexit decision, the loonie dipped more than a cent, closing at 76.93 U.S. cents. While the loonie has begun gradually rising since then, the U.S. dollar continues to strengthen, meaning that it could become more expensive for Canadian businesses to travel to the United States or purchase goods.
•Strong housing market
On a positive note, the Brexit vote could help keep interest and mortgage rates low, strengthening an already hot Canadian housing market. However, some economists say this could further push housing prices out of reach for the average consumer.
While Brexit may create some concerns for Canadians, as it stands, the country will not be impacted directly.
There’s speculation that, as a potential indirect effect of Brexit, talks over a Quebec separation from Canada could be reignited. The separation nearly occurred in 1995 following a referendum vote that resulted in a 50.58 per cent decision against Quebec sovereignty - a mere 1.32% difference compared to the recent Brexit vote.
Immediately following the Quebec vote in 1995, the Clarity Act, which empowers the House of Commons to determine if a particular vote represents a clear majority of the population, was introduced. Prime Minister Justin Trudeau, a vocal supporter of the Clarity Act, has warned that the Brexit referendum should not be taken as a direct analogy to any talks related to Quebec.
What Happens Next?
A period of uncertainty is inevitable after such a historic, unprecedented vote. However, the United Kingdom will not leave the EU immediately; it could take as long as two years to negotiate the complex withdrawal process. During that time, the United Kingdom will slowly disentangle itself from the EU and renegotiate its economic agreements.
For more information and resources on risks affecting your business, please contact a CapriCMW Risk Advisor.