Brexit: Just before the polls
20/06/2016

Brexit: Just before the polls

Starting off a very dramatic and challenging week with the U.K referendum which is now three days away having already sent markets into a tailspin as uncertainty amongst most gets thrusted back into the forefront. Fears are that if a Brexit does follow through after the Referendum we are more likely to see another two years of turbulent markets, sluggish world growth and further retractions in the free flow of trade globally. Much of the fear is circulating to the adverse effects that it will likely bring to Britain and the Euro region which are both in the top 5 of the world’s largest economies and both are major drivers in consumption and demand for raw resources but more importantly major markets for finished consumer goods which are produced in the developing world. As such further weakening of these markets or an extension of the current economic stagnation they have been facing will mean that the world will be left limping along for a considerable time forward.

At the same time there are several knock-on effects that are likely to further deteriorate the performance of global trade. With both of these economies being put under an unfavorable light after a Brexit, it will likely be the case that investors will also look at their respective currencies in a similar manner. This means that the U.S. Dollar will likely be the main benefactor of this and will as such show considerable strengthening especially in the first couple of months after the referendum. With the U.S. Dollar strengthening so quickly, we are likely going to see the relative price of commodities on the rise, deterring as such demand for them as the price will be non-reflective of any improvement in demand. Following on after that and given that the Dollar will uphold its strength for a considerable amount of time, we will also likely see several of the best performing developing nations get stifled under this increase in value and as such lose steam from their current economic performance. This in combination with slower demand form Europe and Britain will likely mean a slight retraction in industrial production overall, brining things a step back rather than helping things move forward in a positive direction. In line with this the U.S. economy will likely benefit in terms of investment flow, as many investors will seek to divert their funds to the safe haven of U.S. denominated investment prospects, though at the same time U.S. exports are likely to softer in the near-term as U.S. exports lose ever more of their competitive advantage due to the price hike brought about by the fluctuations in exchange rates.

Beyond this we could also witness troubling signs in what remains of Europe, as an exit may well further boost Eurosceptics around the continent and prop up their poll figures, leaving a higher likelihood of further exits in the future. In line with this we could also possibly see a further stifling of trade agreements as governments and populist leaders around the globe drive for further internal focus within their respective countries and divert away from further opening of trade towards higher protectionist measures for their local industries. All of these would have further deteriorating consequences for seaborne trade and a major step back from the radicle upward trajectory achieved in the early 2000’s thanks to the dropping of trade barriers and restrictions back then.

All in all, the industry is not exactly in an ideal state to take on even the least ideal of these scenarios so let’s hope for the best and that even if an unfavorable outcome does arise, it will turn out to be less of a shock to the world economy then what can be imagined.

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