On June 23, UK voters opted to leave the European Union. While the long-term consequences of Brexit are uncertain, the global markets saw significant volatility in the wake of the historic vote. According to Raymond James Chief Economist Scott Brown, “This isn’t a Lehman-type event. While the UK economy faces the likelihood of slower growth, financial market volatility should begin to settle down soon.”
For the U.S., the biggest impact of the “leave” vote is a stronger dollar, which will put pressure on exports. But with just 5.7% of total U.S. exports going to the UK, the impact to the real U.S. economy should be marginal. U.S. companies that rely on business sales to the UK (machinery, equipment, technology and other business investments) will have more exposure than segments of the market that sell to UK consumers. In addition, businesses whose UK operations served as a means to access the free-trade bloc in the EU could see a decline in profits and a changing regulatory environment.
If investors continue to seek safety in the dollar and uncertainty intensifies, Brexit will most likely lead the Fed to delay any interest rate hikes for the near term. According to Gregory Daco, head of U.S. Macroeconomics at Oxford Economics: “We now expect there will be only one rate hike in 2016 in September. We would note there is a risk the Fed could push back the expected trajectory of tightening even further if domestic economic data disappoint or aforementioned headwinds do not diminish.”
In thinking about the impact on your organization, you will want to consider not only legal and regulatory changes but also market reactions, consumer and business behaviors, and the wider political and economic environment. Five high-level issues are top of mind:
- Exposure to the UK or EU: The Brexit vote is projected to be a drag on growth for both the UK and the EU, so companies should evaluate their exposure to these markets. Consider not only obvious connections with direct subsidiaries or suppliers that may face financial pressures, but exposure to banking partners who may have counterparty credit exposure with powerful UK financial institutions.
- Impact of the strong dollar: The biggest impact of the “leave” vote is a flight to safety for the dollar. Some forecasts show the $/£ rates approaching parity, and uncertainty will spread to the euro as well. Companies should assess their revenue portfolio to determine the impact currency conversion will have on their top-line growth. In addition, companies should consider hedging strategies to manage exchange rate risk.
- Regulatory impacts: The Brexit vote will likely add to the regulatory burden, as the UK grapples with 40 years of a regulatory framework that is not enshrined in UK law. Companies should develop processes to react and adapt to new regulations from the UK that may differ from the prior EU requirements.
- Enterprise risk: One of the biggest questions for U.S. businesses is preparing for additional global threats, which could include other major economies exiting the EU. Companies should test their resilience and agility to contend with multiple scenarios.
- Tax structure: Many companies have used the UK as their European headquarters and to facilitate entry into the European market. This may no longer make sense. Any change in locations should be accompanied by a review of global tax structure to evaluate locations that offer the best advantages for the business.
As further developments take place, Grant Thornton will be providing insight and analysis which you can find at http://www.grantthornton.co.uk/brexit
. While the implications for U.S. companies are unclear, our professionals stand by to assist as you consider the implications to your business.
For more information, contact:
National Managing Partner, Markets, Clients & Industry
T +1 212 624 5310
National Managing Principal, Advisory Services
T +1 703 637 2866
Partner, International Tax
T +1 704 632 6837