BREXIT decided… Bigger worry is how long is the queue? Who may be next?
It’s classic principle that non-performing economies can’t live-off on free cash perpetually – especially without any accountability or absence of strict austerity measures which are effective & kicking.
Its a clear that “sentiments & confidence” about UK’s own long term prosperity is better decided by own – has presided over – scientific analysis of future economic scenarios to understand whether such step is justified. Ok, that’s only UK/EU issue for now.
Cross border trade between UK & other countries are complimenting each other in value terms.
E.g. Automotive:
Total vehicles sold in UK: approx. 2.5 million
– Imported from other countries: approx. 2.2 million
– Of which, how much goes to EU countries: whopping 50-55 %!!
– i.e. locally assembled sold in UK are only: approx. 0.3 million!!
– Likewise, 45% – 55% components required for such vehicle assembly within UK and re-export to EU countries actually comes from EU region.
Net trade balance (imports v/s exports) between UK & EU countries: GBP 28 billion v/s GBP 26 billion; this is again set to go in favour of UK industry till the time Sterling is devalued!
(source for figures: article by Mr. Abdul Majeed: http://auto.economictimes.indiatimes.com/autologue/brexit-and-its-impact-on-indian-automotive-sector/1588 )
Likewise, engineering sector too “may” have similar figures, though I am not sure in particular.
With not so robust economic scenario already prevalent, companies will anyway not invest in more manufacturing facilities. Moreover, if above trade balance is what one has to go by, there doesn’t seem to be need in additional capital outlays in capacities. Nor component development & supplies required for such manufacturing activity can come from other countries / regions overnight and that too at more competitive prices.
So status quo is more certain to prevail on life-cycle of such products.
These economic compulsions will actually force both sides (UK & EU/ countries) to swiftly agree upon new trade pacts (at least for those sectors where such trade balance & inter-dependencies are high) to keep the already fragile economies moving forward instead of putting them on ventilators & give some knee jerk reactions.
However all these aspects now depends on how UK establishment quickly stitches new trade pacts with EU countries and those across globe.
From India specific-lens:
As far as India is concerned, it will bounce back soon as Indian market just started to come back to recovery path – and – the recovery was not driven by exports to UK per se but improvement in domestic market conditions.
Only impacted parties are the ones which have invested in UK with an intention to access EU market in totality – that too – those which are in manufacturing sector. Service sector will be largely insulated from this as new service contracts will be drawn up and business will be smooth as usual in no time.
Considering relative crash in currency valuation is significantly more of Sterling than that of EURO (vis-a-vis INR), other section which will be impacted (at least in short-term) which have higher exposure to UK exports. Companies/ agencies with significant export dependencies to UK will suddenly see topline vanishing by massive ~8%. Sectors such as agricultural produce / processed food / horticulture etc. may see direct impact due to devaluation of currencies. Export volume (quantities) of star-agri fruit / horticulture produce (mangoes etc.) may still be same for but they will yield lower revenues. The dip value in comparative Indian market prices may or may not divert the volume to Indian markets to lower prices of such commodities. So, impact on Indian market prices may be negligible for such farmer oriented markets. But, surely it will give political parties a talking point to push some agendas.
Currency devaluation’s adverse impact may also be witnessed by companies with large export exposure to UK in other sectors – to name a few – Pharmaceuticals, EMS, IT etc. Selective scripts in market will take a hit as revenue will vanish by ~8% with immediate effect from next shipment even as cost base remains same.
Positive impact of this will be faced by sectors where there are imports from UK as Indian customers may get better deals – esp. considering the hostile situation between UK & EU region.
It is just that India will have to compete even harder with Eastern European countries to retain it’s market share due to devaluation of Sterling. But, if seen differently, it can turn in to new opportunity for India as all countries will have to compete with India which was not a level playing field earlier…
For global citizens at large – one thing is for sure, UK tourism & education bills will go down, at least in short term. In long term, travel to UK / Europe may become even more attractive as all neighboring countries will have to become more competitive!
Just a thought…
