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Brexit and the middle market
Following a four-month campaign, the United Kingdom on June 23, 2016, voted by the narrowest of margins to end its 43-year membership in the European Union (EU). The Brexit decision will no doubt have far-reaching impact. But what does it mean for middle market companies in the United States? It starts with the impact on the U.K. itself.
The mechanics of an exit will likely take up to two years to complete. During this time, and beyond, the U.K. will witness a fundamental reshaping of its political and economic relationships with the rest of the world. Amid the noise, companies must begin to consider how they will operate in a new future with the U.K. outside the EU.
For the U.K. this is not a one-sided slide into doom and gloom. Once the divorce is final, the depreciation of the currency should boost exports via the trade channel for manufactured goods and financial and insurance services, which should partially offset the loss of economic activity elsewhere. This will, however, require a large number of free-trade agreements with the other 27 members of the EU, the U.K.'s largest trading partner, in a relatively short period of time.
The brief honeymoon in markets and economics following the Brexit vote has come to an end. The pickup in spending, driven by tourism and consumption by domestic residents ahead of looming price increases related to the nearly 20 percent depreciation of the British pound, will likely abate in coming months as the likelihood of a potential “hard Brexit” nears. With inflation likely to rise in coming months, the burden of adjustment will fall squarely on the shoulders of British households as firms begin to pass along rising costs to consumers.
On Nov. 3, a panel of judges in the U.K. ruled that Prime Minister Theresa May’s government must seek Parliament approval of any decision to trigger Article 50. May had earlier indicated she would like her government to trigger Article 50 by the end of the first quarter of 2017. While this doesn’t change the base case scenario for an exit from the EU, it does increase uncertainty in the near term and lengthens the period of negotiation. Regardless, Brexit will likely result in firms being forced to make hard decisions on personnel and investments. The growing probability that the U.K. will forego seeking access to the single European market will present its own challenges for the domestic economy.
U.S.-based companies with significant U.K. operations should be considering strategies that align with different scenarios that could play out as Brexit unfolds. For companies with limited exposure to the U.K., the external pressures may be less, however the indirect economic risks are worthy of consideration regardless of global activity.
At RSM, we are closely watching the developments in the U.K. and the greater European market, and conversing with our counterparts at RSM member firms worldwide. Our international team is poised to assist middle market companies with navigating this new frontier in the global economy.