After Brexit, Now What?

BrexitAfter Brexit, Now What?

After Brexit, Now What?

In a move that shocked the country and the world, voters in Britain passed a measure in June to leave the EU. The result might be old news, but the effects are definitely still being felt. One thing is certain: no one knows that the future will hold. Brexit puts Britain, the EU, and the global economy in uncharted waters with no clear path of how to proceed.

2Q Results

Quarterly results are the lifeblood of many companies and one way customers and competitors can see how companies are performing. One of the most telling indications for the future of the economy will occur over the next few weeks as U.K. banks report their second-quarter results. Even positive earnings results will be overshadowed by other announcements as anxious investors around the world are bracing for more announcements of cost-cutting initiatives after the rockiness of Brexit.
In total, the five major U.K. banks are all implementing drastic cost-cutting initiatives to trim roughly $15 billion between them. The most common methods for cutting costs is to relegate assets and lay off staff. However, the plans have had mixed reviews as many people question whether the moves will make a different in the long run.
“I don’t think any bank’s current cost-cutting plans are sufficient to generate normalized returns in the time periods they’re targeting,” said Ian Gordon, an analyst at Investec. “Will branch closures continue? Yes. Might they accelerate? Yes. For capital markets and investment banks, will we see cost takeout? Yes. Will we see further streamlining? Yes.”

Universal Downgrades

Most major banks across the U.K. have downgraded their earnings outlooks in the wake of the Brexit vote, and the industry as a whole has been hit with lower expectations and decreased revenue estimates.
A recent report found that business activity in the U.K. has shrunk at an incredibly fast rate last matched by the plunge during the last recession seven years ago. In the meantime, the Bank of England is preparing a stimulus for August. Potential inclusions in the stimulus are more quantities easing or a decrease from the already low interest rate of 0.5 percent. There is a lot of debate surrounding a potential interest rate decrease, as some people believe it is too soon and others don’t want to risk waiting too long to make a move.
In the weeks since Brexit, economic growth and spending has slowed significantly and inflation has increased much more quickly than normal. Inflation stood at 0.5% in early June and will balloon to 2.2% by the second quarter of 2017, a level much higher than the central bank’s target of 2.0%.

Moving Business from the U.K.

A major fear of investors and employees following the Brexit vote was if company headquarters and positions would be moved out of London, which is currently the central hub for most major corporations’ European operations. Leaving the EU could potentially change passporting for British citizens, making it much more difficult to travel to other European countries. Reports from companies are across the board—HSBC chairman Douglas Flint said his company will only relocate 1,000 employees if passporting rights are lost.
According to some experts and executives, many companies are waiting to see what stimulus package the Bank of England passes before making any major decisions.

Uncertain Future

Such an unprecedented vote leads to an unknown future. Although many major banks will likely be cutting staff and closing branches after Brexit, few are making any larger decisions in the near term.
“Cost cutting is the only thing they can do,” said Gary Greenwood, a Shore Capital analyst. “It’s the only thing in their control.”
It remains to see how Britain’s trading relationship with the rest of Europe will change after it leaves the EU—trade will play a major role in how the market moves and if companies will stay in London or note. Aside from the numbers game, morale seems to be down. 52% of manufacturing firms said they were less optimistic about the general business situation than they were three months ago, a sentiment that is shared with employees and executives across many industries.
The ramifications from the Brexit vote will send waves around the global economy. We are just beginning to see the results of this historic decision, and things likely won’t go back to normal for quite some time.