In late June, Britain voted and declared its intent to break away from the European Union. Even though the UK’s actual departure from the economic union won’t occur for at least two years, a lot has already happened in the UK. The vote visibly rocked global financial markets from the day that the results were announced. Should small and medium sized business owners on the other side of the world be concerned? Well, it depends…
What is the Brexit “rollercoaster”?
Brexit signals the beginning of some radical changes for the UK. This type of large scale economic change creates uncertainty, and uncertainty is bad for business. Because the UK, specifically London, is one of the most important economic centers in the world, big changes there have major consequences abroad, especially in places that have close economic ties with the UK, like the US, China, and continental Europe.
The political and social upheaval that have resulted from the vote so far have undermined investor confidence and leaves reserve banks all over the world in a tricky position. The British pound, and share markets have plunged, recovered, plateaued, and plunged again as the political and economic landscape has tried to reorganise itself to prepare for the divorce.
What does all this have to do with the lands down under?
While Australia and New Zealand are much more economically diversified now than they were in the past, we aren’t immune to the effects of Brexit. As a matter of fact, we’re already feeling some economic backlash beyond the initial shock of the vote, which saw the AUD drop 3% of its value in a day. Despite this, the effects haven’t been devastating by any means. Britain’s longer term financial “rollercoaster” is going to be felt in Australia and New Zealand in more subtle ways.
Global interest rates
Both countries have made rate cuts since the vote to encourage borrowing. This is actually beneficial to small businesses, because it makes it easier and cheaper to access credit resources. With Australia’s interest rates held at 1.5% and New Zealand’s at 2%, it’s a good time to look to credit as a solution for cashflow issues.
The problem with rate cuts, though, is that they can also undermine investor confidence further, because they might be interpreted as a signal that the economy is weak, and needs support. More accessible credit also means riskier debts, and the potential growth of economic bubbles, which can lead to financial crises similar to the US’s housing crisis in 2008. Considering all the recent conjecture about a theoretical Australian real estate bubble, this might be something to watch out for.
Small businesses can take advantage of these current favourable conditions to open lines of credit or to set up standby finance facilities for later use. These aren’t for fun, they’ll help businesses deal with potential cash flow disruptions and provide better financial security in an uncertain international environment.
Trade with the UK
Businesses that are engaged in commerce with the UK are going to face some changes when Brexit is eventually implemented. The EU agreements and regulations that govern trade with outside countries won’t apply to the UK anymore, leaving them to negotiate new deals and decide what kind of international trade they want to have. It’s very likely that this will lead to more economic uncertainty, while also directly causing some disruptions in trade.
These problems aren’t only the UK’s to solve either. Australia has been working on a free trade deal with the EU for some time, and has been forced to choose between finishing negotiations with the EU, or prioritising a separate agreement with the UK. Despite their special relationship, Australia will focus on the EU agreement first, which will delay progress with the UK for years.
Foreign recessions and trade
If the UK economy goes into recession, or if growth grinds to a halt, it won’t just affect those Australians who have business partners in the UK. The world economy is extremely interconnected, and economic slowdowns in Britain would exacerbate the barely contained growth problems of their closest partners, namely China, the US, and continental Europe. It’s very unlikely that it would trigger a global economic catastrophe, as some pundits are suggesting, but it would certainly result in increased financial stress on critical international partners for many Australian and New Zealand businesses.
Since New Zealand and Australia both work with multiple major economic blocs, our economies and financial markets overall can weather direct effects of Brexit without serious concerns. However, individual businesses who have important relationships in the countries that will be directly affected can expect turbulent times.
A good way for SMEs to prepare for this would be to find ways to diversify their relationships and find business partners in a variety of different economic blocs. This will make it easier to deal with the unexpected loss of a major client or supplier.
In conclusion, while many more locally oriented businesses won’t be affected, they do stand to benefit from the historically low interest rates that Brexit is producing around the world. Australian and Kiwi enterprises that have interests abroad will need to be mindful of the ongoing situation as it relates to their industry, and will weather the upheaval without major issues. We’ll offer further updates on the effect that Brexit is having on small and medium sized business down under as the situation progresses over the coming months and years. Stay tuned!