The only certainty is uncertainty by Stuart Warner

by Heather Dandridge  11-Jul-2016 at 17:06

The only certainty is uncertainty by Stuart Warner
of Financial Fluency

One of the main impacts of the Brexit vote is uncertainty. This uncertainty, especially over the economy, will have a large short-term impact on most businesses.

Although the Chancellor has attempted to reassure the UK that the economy is "strong": he has abandoned his 2020 budget surplus target; Britain has still been stripped of its triple-A credit rating; major companies such as Vodafone warned they could move their HQs out of the UK; and there is no apparent clear post-Brexit plan.

As no state has ever left Europe before there are no benchmarks to follow. It's not yet clear which path the UK wants or will be able to follow. Although the UK imports far more than it exports, a much larger proportion of the UK economy is dependent of EU exports (approximately 13%) than the EU economy dependent on the UK exports (approximately 3%).

In addition, the time taken to negotiate new trade deals is another cause of uncertainty. Canada took 7 years to negotiate with the EU and their deal is still not yet ratified.

The stock market is a useful indicator of confidence and European stock indices experienced falls around the continent post Brexit. Around the world global stock markets lost a record $3trn in the two trading days following the vote results. In contract the FTSE-100 proved relatively resilient with the exception of housebuilders, travel companies and of course banks. The FTSE 250, which gives a wider picture of the UK economy, experienced a double digit percentage fall.

Although the pound falling against the dollar by an immediate 10%, a weaker pound could end up being positive for the UK economy by boosting exports and dampening imports. This would help the UK's record current account deficit and may help to restore confidence in the economy.

The big risk is that all of this economic uncertainty leads to business paralysis. Companies hesitate to make investment decisions in times of uncertainty. Budgeting and forecasting is inherently challenging due to economic uncertainty. In addition, the budgeting games that people play will become more prevalent. We tackle some of these issues in my Making Budgeting Work in the Real World course.

However, on a positive note a post-referendum poll by the Institute of Directors found that 34% of company directors planned to hire at the same pace as before or faster and 54% have no plans as yet to cut investment.

Only time will tell.
 
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