by Alissa DeJonge
On June 23, voters in the United Kingdom made the decision to have the UK exit the European Union – an unprecedented split from the 28-country economic and political partnership. It will take at least two years for the terms of the separation to be agreed upon, so the changes and the outcomes will not be fully understood or felt for awhile. While it is obvious that the greatest effects of “Brexit” will be in Europe, companies in Connecticut could be affected for a few different reasons.
Exporting companies are sensitive: Connecticut is particularly linked to Europe through exports. France and Germany are top destinations for Connecticut exports. Plus, Connecticut trading with the United Kingdom is strong, with the UK being Connecticut’s 7th largest exporting destination and our state’s largest source of imports. When there is uncertainty or economic downturns in areas like the UK, there can be decreases in demand for Connecticut’s exports. In addition, exports become more expensive because the U.S. dollar strengthens relative to the British pound or euro (although imports become relatively cheaper, boosting the Connecticut companies with significant imports).
Global companies make location decisions: The UK represents the 7th largest economy in the world. The Brexit process is therefore likely to disrupt global business operations and will have companies rethinking where they do business in Europe and elsewhere. At least 82 UK-based companies are currently doing business in Connecticut. In addition, a number of Connecticut companies use the United Kingdom as a gateway to the EU for operations because once a company has one location in the EU they do not have to obtain separate regulatory approvals in order to do business in other member countries.
As Brexit occurs, tariffs and trading relationships will have to be renegotiated. For companies with their location in the UK and not otherwise in the EU, this will add to business costs. So these companies may prefer to control their costs by moving their European locations out of the UK to avoid the uncertainties related to the renegotiation process.
Uncertainty affects all companies: This additional uncertainty about what the exit agreement will look like adds to the general increased economic uncertainty throughout the world. Brexit is an action that no other European Union country has undertaken and it affects a relatively large economic region. Does this mean that other countries will follow? The answer is unclear. The possibility of a recession in Europe has become more likely as a result of this turmoil.
When there is uncertainty in the global economic outlook, stock markets typically behave erratically. And when there is uncertainty, consumer spending can get held up, as can
company investments. This poses additional risk not just for companies that are thinking globally, but for those with a local focus too, because overall demand for a host of products and services can decrease when consumers and companies are worried about the economic future.
Uncertainty is the ‘name of the game’ for Brexit, and with uncertainty comes risks (and potential rewards) for a host of Connecticut companies. One thing is for certain though – analysts will be tracking and forecasting the outcomes of Brexit for years to come. This ‘British Invasion’ unfortunately has less to do with popular songs and more to do with unpopular economic insecurities.
Alissa DeJonge is Vice President of Research, Connecticut Economic Resource Center Inc. (CERC).
PERSPECTIVE commentaries by contributing writers appear each Sunday on Connecticut by the Numbers.
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