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Brexit is one of the greatest economic situation that have had diverse impacts on many world economies (Belam, 2016). The relationship between Britain and Europe has been fraught since 1973 when it joined the EU. On being a member of the EU, many positive benefits has been received by the participating economies in terms of trade and investments. These positive benefits have been the major focus of the camp. On the other hand, the losses perceived to happen has been concentrate by pro-Brexiters. Some of these losses include; the sovereignty loss, lack of immigration controls and undue regulations (Smales, 2016 and Farr, 2016)). The extreme volatility of Brexit is projected take place in the short run (Keany, 2016). The global economy has become so fragile with weak economic growth and massive debts despite the fact that the interest rate has been at lower levels.
The Australian markets are most likely to be impacted by the turmoil on offshore markets owing to their close links. The increasing uncertainty is making the investors develop a risk-off mentality which has influenced the sharp decline in both the Australian dollar and the Australian stock market. The bond yields are also projected to fall since investors are expected to flight for quality as the uncertainty rise.
The recent Brexit is predicted to cause turmoil in the global financial markets and the UK. It is said to be possible that Brexit will facilitate anther global financial crisis. Smales noted that it is in the foreign exchange market that the effects will be most keenly felt. During this year, there has been a 6.6 % depreciation in the trade-weighted-index. Currently, this trade-weighted-index is moving depending on the changes in the Brexit polling. The Sterling devaluation according to George Soros would depreciate by at least 15 % (Sjolin, 2016); this in reference with the Black Wednesday Crisis which happened on the Bank of England in 1992 (Smales, 2016).
The offshore funding required by Australian would become difficult to be accessed by the big Australian Banks if there will be a seize up in the financial markets similar to the one experienced in 2008 (Farr, 2016). There will be a sharp fall in the share prices and hence there will be a call for a government guarantee. This uncertainty is keeping away the fainthearted from investing in the financial markets.
The US Federal citing was that the interest rate was left unchanged in June owing to the Brexit uncertainty. The desire in structural change promotion is less with Australia which makes the fiscal position not supportive in stimulating economic growth. Brexit will have an impact on the interest rate if the United States Federal Reserve will be more reluctant to raise its interest rate owing to the market volatility (Yeates, 2016). If the hikes by the Fed is delayed, the RBA will experience a higher value of the Australian dollar which is contrary to its wish. Due to this reason, the RBA’s odd of cutting the interest rate further would be increased. This would have been meant to stimulate growth and in lowering its dollar value.
The EU and the UK are great trade partners. The UK’s trade with the EU is around 50 %. If the Brexit occurred, there would be a great loss in the market share of the UK’s trade. This has caused tension on the side of the investors. It is uncertain that the UK and the EU would maintain the benefits received from a free trade zone in the situation where the UK will be no longer a member of the EU; the reference to this is the Norway and Switzerland situation where these two countries agreed to leave their terms of trade unchanged after the indifferences between them. The confidence of investors is reduced with the rising polling of the Brexit.
The UK is the 7th largest Australian partner, and therefore the impacts are projected to impact Australia severely in the long term. Currently, the GDP of Australia is dependent on the increased exports level. This level would be reduced in the presence of a Brexit causing Australia to lose a market for its exports. Brendan Rynne, the Australia KPMG chief economist, gave a warning that trade negotiations with the UK won’t be easier with the Brexit (Greber, 2016).
The delay of investment means that the economic growth in the Australian economy will fall. This explains the current rise in the unemployment rate. Since firms’ production level will be reduced, it is expected that the number of labourers required for the same will be greatly reduced. The suggestion of the Bank of England is that inflation will be stoked by the Brexit and the unemployment rate will rise.
The general price of goods and services in Australia may rise as the Brexit poll changes. Australia has been experiencing low inflation rates which have put it at a risk of falling into a recession. The cutting of the interest rate has not been effective in stimulating the inflation rate.
The spending by consumers and businesses is determined by their future expectations. An increase in the Brexit polling is discouraging both consumers and businesses (Keany, 2016). For example, NewsComAu (2016) noted that though the Britain consumers will experience low prices of goods, the Australian consumers spending will be affected by increased prices of goods and services. E.g. an extra visa for Australians.
It is expected that the Brexit would have indirect inflationary effects. Since it is expected that the economic growth will fall owing to the Brexit, the production level is also expected to fall. This will result in a reduction in supply. When supply is low, the producers always wish to raise their price for supplying the goods or services. The price of goods is therefore expected to go up in the long run.
The impacts on the financial markets according to Yeates (2016) would result in consumers curbing their spending which would lower the quantity of goods and services demanded. There will be increased cautious on the side of businesses in investing. This may low production which consequently will lower the supply in the economy.
There is deferment of business decisions, and firms are making decisions to take their businesses elsewhere. Most firms’ aim is to maximize their wealth, and they, therefore, don’t like taking huge chances of loss. The production level in the Australian economy has fallen and is projected to continue falling as an impact of the Brexit.
Whereas the short-term effects of Brexit can easily be determined, it is difficult to project that of the long term, it is surrounded with lots of uncertainties. The Britain exit is not an easy thing, and some conditions of exit has to be set and this may take a long time. The impacts will be felt differently depending on the links with the UK.
Belam, M. (2016). One month on, what has been the impact of the Brexit vote so far? [Online] the Guardian. Available at: https://www.theguardian.com/politics/2016/jul/22/one-month-on-what-is-the-impact-of-the-brexit-vote-so-far [Accessed 22 Sep. 2016].
Farr, M. (2016). How Brexit decision will affect Australia. [Online] NewsComAu. Available at: https://www.news.com.au/finance/economy/australian-economy/brexit-how-the-result-will-affect-australia/news-story/e2826b95d588a92e6ab6aa644118d0b6 [Accessed 21 Sep. 2016].
Greber, J. (2016). Brexit impact will be felt in Australian trade, say analysts. [Online] Financial Review. Available at: https://www.afr.com/news/economy/brexit-impact-will-be-felt-in-australian-trade-say-analysts-20160627-gpsux9 [Accessed 21 Sep. 2016].
Keany, F. (2016). Brexit to have 'very limited' short-term impact in Australia: report. [Online] ABC News. Available at: https://www.abc.net.au/news/2016-07-21/report-says-brexit-impact-to-be-'very-limited'-in-short-term/7649496 [Accessed 22 Sep. 2016].
Newscom Au. (2016). What Brexit means for consumers. [Online] Available at: https://www.news.com.au/finance/economy/australian-economy/what-brexit-means-for-consumers/news-story/dea1d3dffd2bb969f40938778e330b1a [Accessed 21 Sep. 2016].
Sjolin, S. (2016). The Brexit effect: First hard U.K. data trickle in. [online] MarketWatch. Available at: https://www.marketwatch.com/story/the-brexit-effect-get-ready-for-the-first-hard-data-on-the-uk-economy-2016-08-15 [Accessed 20 Sep. 2016].
Smales, L. (2016). How a Brexit could impact on Australia. [Online] The Conversation. Available at: https://theconversation.com/how-a-brexit-could-impact-on-australia-61301 [Accessed 20 Sep. 2016].
Yeates, C. (2016). Brexit: What it means for the economy. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/brexit-what-it-means-for-the-economy-20160624-gpr4cw.html [Accessed 21 Sep. 2016].
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