In late June, the voters of the United Kingdom (UK) voted to exit the European Union (EU) in a vote dubbed Brexit, despite the UK financial establishment’s warnings that any exit was likely to have negative effects on the British economy. Observers also pointed out that the move could have major impacts on U.S. businesses whose overseas operations were headquartered in the UK.
So far, it looks on the surface as if the warnings about Brexit were far too dire. Consumer spending and business sentiment both have returned to robust levels in the UK, and stock markets on both sides of the Atlantic continue to rise.
Brexit: Uncertainty, Uncertainty, Uncertainty, Plus a Contracting UK Economy
A recent article in the Harvard Business Review, however, reiterates that Brexit poses many threats to the UK and US economy, and to economies worldwide.
The chief threat is uncertainty, which poses challenges to businesses worldwide. Uncertainty affects the trading of financial markets and the price of real property as well.
First, the terms of Brexit will be unfolding throughout a two-year period. It is not a one-time bang. Trade terms, movement of goods and people, tariffs, and more are to be negotiated among the UK and the member states of the UK. Economies and stock markets almost never thrive in periods of uncertainty, and they are in for at least 24 months of it.
Second, the Brexit vote was a concrete instance of a larger global issue, and that is the seeming drawing away from the conditions that created free(r) global trade. The EU stands for the free movement of capital, goods, services, and labor across national borders. In the Brexit vote, that free movement was deemed less important than national borders.
It remains to be seen if there will be more free trade negation, but the rejection of the Trans-Pacific Partnership in the recent U.S. election indicates that there might be. That, in turn, could affect the business and economic policies of nations across the globe. All of these potential changes will contribute to uncertainty and unpredictability.
Finally, the effects of Brexit have, in fact, had a negative effect on the British economy, despite immediate outward appearances to the contrary. The authors estimate the total impact so far as equal to an 8 percent pretax cut in earnings, which will affect purchasing power and national GDP going forward.
Preparing for a Period of Uncertainty
Businesses, then, face a climate in which uncertainty and risk are much greater than in the pre-Brexit world. What should businesses do in terms of strategy?
First, the authors recommend that organizations actively prepare multiple scenarios for the outcome and its potential effects on their business. The HBR article suggests that multiple scenarios for European and global conditions will enable businesses to adapt to changing conditions with optimal speed and flexibility.
It also recommends that businesses become involved in the political debates over free trade. Entering the conversation over impacts, benefits, and drawbacks will help to ensure that economic interests can be considered along with popular national feeling.