Business Environment and Brexit Essay

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Brexit on United Kingdom (UK) economy

The June 23 Brexit vote has undoubtedly shaken the European policy, and impacted the UK economy in ways that are both known and yet to be unraveled. Amid the impacts of the Brexit vote, one sure thing is that the vote has led to significant uncertainty on the future of the European integration process (Fichtner et al., 301). Specific to the UK economy, the Brexit vote is expected to have both short-term and long-term effects. Soon after the vote, there was an increased uncertainty on the prospects of the UK. This considerable increase in uncertainty has been reflected in the rather unstable pound. This essay is based on the argument that, Brexit will harm the UK economy in the short-term but be beneficial in the long-term. Therefore, the essay focuses on the negative effects of Brexit to the UK economy in the short-term and the benefits in the long-term.

Negative effects in the short-term

As a result of the uncertainty that came with the Brexit vote, there was a flight in to assets that are deemed to be 'safe'. As a result of this flight, one and probably the first consequence of Brexit was an increase in price volatility on the financial markets. This began way before the Brexit vote as investors sought to 'insure' their properties through perceived safe assets. As of June, the volatility index of the London's FTSE 100 began to increase (Fichtner et al., 301), and analysts have attributed it to the significant uncertainty that came with Brexit. Immediately after the vote, there were heavy losses in stocks and as a result of these exchange rates, large banks were particularly hard hit. Large banks had their prospects in question because it was unclear the extent to which London's financial center would be able to profit from the free movement of capital within the EU economic zone after Brexit.

The second Brexit short-term effect was in the price of British government bonds "gilts" which were affected by uncertainty through flight-to-quality. The yields of government bonds had a decrease, the interests attached to bonds with a three months maturity period also decreased by more than six basis points, and bonds 30-year maturity bonds fell by about 16 basis points (Fichtner et al., 301). Even though it would be expected that costs of government financing would rise in the medium term as observed in the prices of credit default swaps for gilts, it would be expected that financing costs would be impacted negatively in the medium term as a result of revocation of top rating from the UK by two of the three most important rating agencies.

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After the Brexit vote, and even up to now, the British pound has depreciated significant. As a result, there has been a capital outflow from the UK economy. Within two trading days after the Brexit vote, the value of the British pound fell by about 11.2% against the American dollar and by 8.2% against the euro. Even though this impacted negatively on the economy through cash outflows, it also had some slight beneficial impact especially through increased tourists to the UK as a result of the decreased value of the pound (Fichtner et al. 302; Bachmann, Elstner & Sims, 218-8). With the decreased value of the pound, American tourists to the UK would end up spending fewer dollars thus saving, and contributing to the UK economy.

As a result of the uncertainty that came with Brexit, the business environment in the country has been negatively impacted thus consequentially impacting investments and employment (Buiter et al.; Fichtner et al. 302-3). It is common knowledge that uncertainty in not good for business and it would be expected to invest the UK economy negatively in the short-term, especially in reduced or completely stunted growth as businesses and investors hold in new investments. It would be expected that as negotiations to leave the EU continue, uncertainty will persists and the consequences are direr if these negotiations take several years. This problems raise from the fact that investors want to make decisive investment decisions that are irreversible, at least in the foreseeable future.

As a result of the above consequences, and especially investors holding on new investments in the UK economy, it is expected that in….....

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