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The Near-Term, Medium-Term, and Long-Term Impact of Brexit

Now that the world is recovering from Britain’s surprise vote to leave the European Union, Canadian entrepreneurs have questions about how this may impact their business and the economy today, tomorrow, and down the road. Here’s the lowdown on Brexit’s impact on Canada’s economy and on your business.

Brexit’s Short-Term Impact On the Canadian Economy and Business

In the near-term, Brexit is causing global currencies’ values to shift, impacting the costs of services and supplies between Canadian businesses and those elsewhere. According to RBC Economics’ June report (PDF), “We expect the Brexit vote will have significant financial market effects in the near term.”1

On June 24, the British pound (GBP) nose-dived to a 31-year low.2 The falling pound makes Canadian exports more expensive for customers in the U.K., while British imports become more affordable for Canadians.

Since Brexit, the loonie dropped to 76.22 cents against the American dollar (USD) on June 27 before rising to 77.93 on July 4.3 A lower loonie means American-priced supplies and services get more expensive for business owners, while exports become more affordable to buyers with American dollars.

Medium Term Impact

Over the next several months RBC Economics predicts falling oil prices, yet also expects the pound to continue to fall against the Canadian dollar,1 making this a good opportunity to stock up on supplies from the U.K.

“However, we expect the magnitude of these price adjustments will be much less significant than during the recent oil price shock, and may not be enough to fully reverse the recent rally in oil prices and CAD,” says the RBC report.

These currency shifts may impact your livelihood. Business in energy-producing provinces like Alberta may suffer, while export business from non-energy producing provinces like Ontario may benefit from the loonie declining against the American dollar. 1

Brexit will also result in The Bank of Canada delaying a rise in the overnight lending rate, and corresponding higher consumer and business borrowing interest rates. This delay is good news because it means you could enjoy low business and personal credit rates. 1

Long Term Impact

Brexit is expected to create ripple effects across the world and the Canadian economy, dampening stock markets and delaying expected interest rate hikes in Canada. Yet since the trade partnership between Canada and Britain isn’t very big, Brexit will mostly directly affect Canadian businesses with close trade ties to the U.K. and the EU, both in terms of currency fluctuations as well as long-term laws.1

These businesses should stay up-to-date on the status of the Comprehensive and Economic Trade Agreement (CETA) between the EU and Canada, which was in the works before Brexit.

Though Britain remains a member of the EU for at least another two years,5 the expected exit from the EU will likely delay and change CETA. The proposed agreement would get rid of duties on over 95 percent of Canada’s exports to the EU, particularly benefiting beef and pork producers plus Canadian-based auto assemblers which have a significant customer base in the EU. 4

Now that CETA wouldn’t include the U.K. (over 20 percent of the EU’s economy),4 it’s possible that a new Canada-U.K. trade agreement could emerge, one that could include different terms that may or may not be good for our importers and/or exporters.1

Sources:

1. RBC Economics, June 24, 2016 – Will Brexit send waves across the Atlantic?

2. CBC News, June 24, 2016 – Loonie loses more than a penny, TSX sheds 239 points after Britons vote to quit EU

3. Bank of Canada – CAD/USD Exchange Rate Lookup

4. The Globe & Mail, July 6, 2016- Ottawa reluctant to renegotiate EU trade deal in wake of Brexit vote

5. CBC News, June 25, 2016 – U.K. wants free trade deal with Canada, high commissioner says