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Short term impact of Brexit

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By Mike Eggleton, Senior Manager Analytics & Research

Note: The following is a compilation from various sources on the potential short term impact of Brexit on business and travel, and does not represent an official position on the matter taken by the company.

Background

U.K. voters head to the polls on June 23 in a referendum on European Union (EU) membership. They’ll decide whether the U.K. stays in or leaves the EU – you’ll hear a U.K. departure from the EU referred to as Brexit. The BBC provides a comprehensive primer on the upcoming referendum on its website.

The Financial Times’ Brexit poll tracker shows 44% of voters in favor of staying and 47% favoring Brexit.[1] That still leaves 9% undecided. Electoral experts suggest most undecided voters will opt for the status quo, but in recent weeks the predicted outcome of the poll has switched from “stay” to “leave.” Oxford Economics believes there’s a 70% chance of the U.K. staying in the EU. But with the outcome of the vote too close to call, what if they’re wrong? What happens next?

A vote to leave would trigger a two-year negotiation period to decide what the U.K.’s relationship with the EU will look like in the future. This period can be extended, but only with the unanimous consent of the other member states.

Uncertainty: bad news in the short term

A Brexit decision will almost certainly have some short term consequences including:

  • Uncertainty about the U.K.’s future trading relationship with the EU will hit business confidence, trade and investment. And this has clear implications for business travel.
  • Investor confidence will be hit too, so expect to see a period of volatility in financial markets.
  • Political casualties are inevitable after the referendum result. Upheaval within the government would be unhelpful during such a period of major transition.

Economic impact

We’ve already seen some disruption to economic activity as the referendum approaches, with firms delaying investment decisions until after the vote.

The shock to corporate confidence from a Brexit decision would see companies scale back investment plans, as they wait for clarity on what life outside the EU would look like. Rather than rising by 6.5% in 2017, as is currently expected, business investment would instead fall by nearly 2.5%.[2]

Equity prices would be hit too: Oxford Economics believes the FTSE could easily fall by more than 5% in the second half of 2016.

Currency exchange rates will be the most affected. Oxford Economics predicts the pound will quickly depreciate by 15% against the U.S. dollar, before levelling out at 9% by early 2017. And it’ll lose more than 10% of its value against the Euro. The Brexit shock will also mean the Euro will fall by 4% against the dollar.[3]

A weaker pound is not good news for consumers, as it increases the cost of imports. The higher inflation this brings will weigh on household purchasing power and hit consumer spending. But a weaker pound will boost exporters, as British goods become less expensive in international markets.

All this will add up to a negative for short term economic growth. If the U.K. decides to leave the EU, gross domestic product (GDP) growth will be 1.6%, compared to 2.3% if it stays.

During the two-year negotiation period it should be business-as-usual for the U.K., albeit with some increased political and economic uncertainty. Trade negotiations could take more than two years.  By the end of this period, Brexit will have cost the U.K. 1.3 percentage points of growth, “a noticeable, but not catastrophic” impact on its economy.[4]

And what about the rest of Europe?

Brexit will have only a “negligible” economic impact on the rest of Europe. It would subtract just 0.4% from EU GDP during the two years of negotiations.[5] Ireland and the Netherlands are the most exposed economies, because of their stronger trade and investment links with the U.K.

A smooth and successful exit from the EU may not be in everyone’s interests. Pro-EU policymakers may fear Brexit could encourage other countries to review their membership. These fears are largely unfounded – most countries are members of the Eurozone, and leaving the currency union would be far more complicated and costly than simply leaving the EU. But it’s still possible that such fears could make the EU reluctant to grant the U.K. the most favorable terms after exit. The disruption and costs of Brexit could turn out much larger than expected.

Brexit and travel

For the travel industry, ABTA (Association of British Travel Agents) believes the potential risks and uncertainty of leaving the European Union outweigh any advantages.[6] The organization’s CEO, Mark Tanzer, considers a vote to leave the EU “will lead to uncertainties and may lead to increased costs for travel businesses and the traveling public.”

Brexit will require changes to key travel regulation, including the single European aviation market, open skies agreements, consumer protection laws and rules over flight delay compensation. Many of these regulations benefit and protect both business and leisure travelers. Getting between the U.K. and Europe could become more difficult. Travelers might even need visas for extended overseas stays in the U.K. or EU in future. Brexit may also affect European travelers’ access to free emergency healthcare when travelling within the EU and Switzerland.

An end to the freedom of movement within Europe will mean extra administration for travelers, travel managers and TMCs. And that will increase costs. The hospitality industry may also suffer, because of its dependence on migrant employees.

Brexit could damage the strong travel flows from the U.K. to Europe. As the EU is the U.K.’s most important export market, any disruption to trade links will hit business travel. A weaker pound will mean that travel buyers’ budgets won’t stretch as far for international travel. But it will make visiting the U.K.  less expensive for international travelers. That should be good news for U.K. hotels.

EU regulation has helped open up the European air travel market. It’s meant cheaper flights and more destinations. Monarch Airlines CEO, Andrew Swaffield, has warned an exit would “most likely” lead to higher air fares and fewer scheduled flights between the U.K. and EU.[7]

Like any other sector, following a vote to leave the EU, travel would be exposed to a prolonged period of uncertainty as treaties and regulations are renegotiated.

 

Do you have questions or comments regarding this report? Please email [email protected] to share your thoughts.

 

[1] Financial Times, Brexit poll tracker, June 15, 2016
[2] Oxford Economics, The short-term impact of Brexit, March 2016
[3] Oxford Economics, Global Scenarios, June 2016
[4] Oxford Economics
[5] According to analysis by Oxford Economics
[6] Travelmole, Brexit would be bad for travel, say ABTA, March 15, 2016
[7] The Guardian, Brexit risks higher fares and fewer flights for UK tourists, March 16, 2016

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