In the months leading up to Britain’s referendum on whether to leave the European Union, several economists warned repeatedly that a "Brexit" could have awful ripple effects. They predicted Britain could lose its favorable access to European markets if it left. The uncertainty could dry up business investment and the country could tumble into recession.
And on Thursday (June 24) the picture was crystal clear. The United Kingdom chose to “Leave” European Union with a thin margin – 51. 9 percent voting in favour of “Leave” as against 48.1 percent for “Remain”. While the political fallout of the referendum made UK Prime Minister David Cameron to step down, it is the economic fallout of the referendum that will keep global economies nervous for a long time.
How bad this is going to be for the United Kingdom and for the rest of the world markets? Immediately after the results were out, the impact began to be seen across markets around the world. Markets were plunging sharply around the world, suggesting major economic risks on the horizon. US equities markets opened sharply lower on Friday (June 24). Dow Jones Industrial Average saw a decline of more than 600 points at the close on Friday, a 3.4 percent drop that wiped out year-to-date gains.
Shares of transportation and logistics companies took heavy hits in trading on world markets on Friday. Shares in XPO Logistics Inc. plummeted 14.9 percent by mid afternoon, to $24.16. A research note by Citi said the US-based logistics operator is heavily exposed to the impact of Brexit, with 12 percent of its revenue from the UK.
United Parcel Service shares were off 2.2 percent to $104.83 and shares in FedEx declined 3.8 percent to $151.93 in New York trading. In Europe, shares in A P Moller-Maersk, parent of ocean cargo carrier Maersk Line, fell 3.1 percent and logistics provider DSV A/S declined 5.2 percent in trading in Copenhagen.[caption id="attachment_1423" align="aligncenter" width="480"] Photo: Leon Neal/AFP/Getty Images[/caption]
The impact is truly global. According to a report in Bloomberg, China Logistics Property Holdings, the warehouse developer backed by Carlyle Group LP, will delay the launch of its $400 million Hong Kong initial public offering.
“The Shanghai-based company will postpone the start of the share sale until June 29 due to volatile market conditions after Britain voted to leave the European Union. It had originally scheduled to begin taking investor orders on June 27,” said the report.
In an interview to CNBC, John Van Reenen, director of the Centre for Economic Performance at the London School of Economics said the short-term impacts would be painful: "You get a rabbit-in-the-headlights phenomenon where businesses don't want to make new decisions, or new investments, because they are uncertain about the future. The immediate effect will be a lowering of investment activity, a lowering of hiring. There will an immediate slowdown of growth,” Reenen told the channel.
While the global markets have reacted sharply to the immediate after effects of Britain’s decision to leave European Union, the actual impact is going be gradual. Effects may take years to play out as the UK rebuilds trade relationships while companies rethink distribution channels and pause their acquisition activities.
Shipping and logistics companies said the “Brexit” vote could have a two-pronged impact in the near term, potentially cutting into the movement of goods but also fueling more demand for services to help retailers and manufacturers navigate changing regulations and trade rules.
Commenting on the referendum outcome British International Freight Association (BIFA) said the trade association will ensure that the movement of the UK’s visible import and export trade does not become overburdened by over complicated trade procedures. “BIFA is a neutral body and will now be looking at the ways in which we can support our members as the forthcoming legislative changes become apparent between now, the day that the UK formally triggers the resignation process and the date the country’s exit becomes effective,” said Robert Keen, director general of BIFA.
“Today the UK is still a member of the EU and it is too soon to start speculation on the outcome of two years plus of negotiations regarding trade deals and movement of goods. We will be making sure that those undertaking the negotiations recognise the fundamental role that our members’ freight forwarding services, including customs processing, play in underpinning the movement of the UK’s visible trade with Europe,: Keen added.
The International Air Transport Association’s (IATA) preliminary estimates suggest that the near-term impact on the UK air freight market is less certain, but freight will be affected by lower international trade in the longer term. According to IATA, the big issue is with aviation regulation. The UK faces a trade-off between accessing the European Single Aviation Market and having the policy freedom to set its own regulations.
“As leaders in the UK and the EU work to establish a new framework for their relationship, one certainty to guide them is the need and desire of people on both sides of that relationship to travel and trade. Air transport plays a major role in making that possible. There were 117 million air passenger journeys between the UK and the EU in 2015. Air links facilitate business, support jobs and build prosperity. It is critical that whatever form the new UK-EU relationship takes, it must continue to ensure the common interests of safe, secure, efficient and sustainable air connectivity," said Tony Tyler, IATA’s Director General and CEO.
According to IATA, the number of UK air passengers could be 3-5 percent lower by 2020, driven by the expected downturn in economic activity and the fall in the sterling exchange rate.
For the first two years, until the UK officially exits the EU, it is expected that EU customs and trade laws will remain in place in the UK. One of the areas that will have an impact after exit from the EU is Free Trade Agreements (FTA). When the UK exits the EU, it will cease to be party to the EU trade agreements and preferential programmes and it will have to renegotiate separate and new trade agreements.
“Today, if you’re in the UK and you purchase goods from another European country, it’s like you’re purchasing it from your own country,” said Jens Bjørn Andersen, CEO of DSV. But after Brexit, that “will be more cumbersome. There will be VAT and duties, taxes put on the products. Of course, these are services that we offer our customers, so it’s also an opportunity for the logistics industry,” Andersen was quoted in a report in The Wall Street Journal.