By Siti Radziah Hamzah
KUALA LUMPUR (Bernama) — British vote to exit from the European Union (EU) has defied market assumption that the United Kingdom (UK) will stay in the economic bloc it joined since 1973, in a historic referendum held on June 23, 2016.
The referendum, which acted as an advice to the British government, will undergo two years of negotiation to finalise the ‘divorce’ from the economic bloc, which generated about €13.920 trillion in gross domestic product in 2014.
A tight race saw 51.9 per cent of Britons vote to leave the EU (Brexit) while the remaining 48.1 per cent chose to remain in the bloc.
The long-term impact of Brexit will depend on the new relationship between the UK and EU while the short-term impact will, to some extent, depends on damage control responses by leaders of the UK and EU.
Pun intended, English physicist Isaac Newton in its Third Law of Motion had stated that “for every action, there is an equal and opposite reaction”.
A ‘leave’ vote will essentially put an end to the UK’s existing participation in the Europe-wide economic and political circle.
Exiting the EU will also mean jeopardising UK’s reputation as a global financial centre as some US, Japanese and other non-European banks headquartered in London have reportedly been considering moving parts of their business inside the EU, in the event of Brexit.
A direct market reaction to Brexit was a sharp depreciation of the pound sterling, as fears rekindle over a potential slowdown in the UK.
It should be kept in mind that the Bank of England has repeatedly warned of a possible technical recession from a Brexit outcome, with expectations mounting over a probable future UK interest rate cut as a method of retaining stability.
The pound sterling suffered the most volatile session on Friday (June 24) and hit the lowest level since 1985 as investors fled into safe-haven currencies including the yen and US dollar.
On a wider scope, Brexit will essentially heightened global economic uncertainties.
FXTM Vice President of Corporate Development and Market Research Jameel Ahmad said with the UK’s exit from the EU, the appeal towards its economy could come under risk.
He pointed out that the EU represented the major trading partner of the UK and one of the main reasons why the UK was extremely appealing for foreign direct investment was due to its accessibility to the EU market.
“Major businesses are publicly making it clear that employment could be a threat due to the economic uncertainty over Brexit,” he told Bernama in an email interview.
Jameel added that there was an underlying threat that with Brexit, other nations could begin to reconsider their own stance on EU membership, which was one of the reasons why there has been a recent drive in volatility coming out of the Scandinavian region over the past week.
Malaysian Rating Corp Bhd Chief Economist Nor Zahidi Alias said Britain’s exit from the EU would magnify financial market volatility – equities, bonds and currencies as the two largest economies – US and China – were already confronting their own challenges at this juncture.
“Business sentiment will also take a hit due to increasing uncertainties and this will likely put a lid on a possible recovery of the global economy in the near term,” he added.
The relatively evenly split polls in the run-up to the Brexit referendum have already triggered increased volatility in the global market, which has weighed down consumer confidence in the UK, investment behaviour and the pound sterling.
RAM Research said given the deep integration between the UK and the other EU members, there were uncertainties over how economic relations would be handled after Brexit.
“Despite domestic effects, the instability vis-a-vis Brexit is also exerting a negative impact on the global markets,” it said in a note recently.
It added that the ringgit/US dollar was also expected to face some downward pressure — a product of investors’ risk aversion and the reallocation of funds to safe haven currencies.