Brexit, Stocks Crash and British Economy

Brexit is a small six-letter word, but hugely far-reaching in terms of impact. Ever since the referendum was announced by erstwhile British Prime Minister David Cameron, there had build a heady mix of excitement and tension in the months building up to the deciding hour. In the mass voting that followed on June 23rd, a majority of people in the United Kingdom chose to opt out of the European Union. As predicted by many economists, the pound slid down to a 31-year low of a $1.31 against the US Dollar. FTSE 100 found itself in exasperation, as the prices of major futures started plummeting.

This was, of course, caused by the uncertainly about Britain’s future as a financially secure investment destination. And the fact that the GBP (Pound Sterling) was already trading at a 31-year low position, did not help. The low depreciation being courted by the GBP, and the sudden uncertainty created by the shocking ‘Leave’ verdict; together served to dismay investors and created widespread panic not just in the UK, but all over Europe. This resulted in frantic overnight flight of capital from Britain, which in turn caused interest rates within the country to fall steeply. The bloodbath was of such proportions that it was termed as “worse than the 1990-era Black Wednesday”.

The FTSE-100 dropped by 3.2%, while others across Europe plunged to even lower depths. GDAXI, FCHI, IBEX, SAN.MC, Unicredit etc. all registered crashes of anywhere between 7 to 8 (or even worse) percent. Outside of Britain and the Eurozone, the Dow Jones (DJI) on Wall Street, USA, was down by a record one-year low of 655 points. Prominent shares, including those of the most respected banking institutions of Britain (such as Barclays and Lloyds) saw a plunge of nearly 36 percent, with total losses estimated at nearly USD $150 million. Though these banks managed to bounce back in the latter half of the day, their earlier price movements had added to the widespread investor panic that had been created in the aftermath of Brexit. Fears of investor pull-outs also led to the currencies of emerging markets such as the Polish Zloty and South African Rand, to undergo major slumps.

And two months after Brexit, Britain’s economy is definitely showing signs of slowing, despite sectors in the industry encountering sectional highs. In order to battle the slowdown, the banks have slashed interest rates and resumed the quantitative easing money creation programmes in order to make loan-getting easier for businesses and individuals alike. The report from the British Retail Consortium (the umbrella association of retail traders in Britain) is nothing to get cheerful about; despair had set in the weeks leading to the referendum, as a result of which lay-offs had started in the retail outlets. This has only deepened in the days after Brexit. According to the Royal Institution of Chartered Surveyors (RICS for short), a pall of post-Brexit gloom has befallen the construction industry. This was due to lessened number of contracts.

Only the Automotive industry of UK has something to cheer about, amidst all this gloom. Production of cars has not only been unaffected by Brexit, but their production has, in fact, gone up in the weeks following June 23. However, there’s a cause of concern here: a whopping majority of the cars produced in British automobile factories are meant for export; and its biggest market is the EU. With Britain heading for a separation, it’s uncertain what the trade relations between EU and UK are going to be in the future. So, organisations like the SMMT (Society of Motor Manufacturers and Traders) can only hope that Britain is not slapped with retaliatory tariffs by EU members who might view the exit as an attempt to shut off the British market to their goods.

But as they say—never lose hope.

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