Growing uncertainty rocks global markets,
Just five days before the vote, growing uncertainty is spreading
With just five days to go before Britain votes whether to leave the European Union, the growing uncertainty about the outcome on June 23 has rocked markets around the globe.
Canada will not be immune. From the value of dollar to future trading relationships, to travel, business investment and even teachers’ pensions, Canada will feel the effect of a British stampede for the exit — should one occur.
“It won’t be disastrous, but there’s certainly nothing good about it,” says Randall Hansen, a director at the University of Toronto’s Munk School of Global Affairs.
Brexit — short for Britain and exit — isn’t the only economic event that made investors skittish this week.
Worries about slowing U.S. job growth also weighed on the U.S. Federal Reserve Board’s decision to leave interest rates unchanged, as expected.
Globally, economic growth rates remain uninspiring.
But on Tuesday, a front page endorsement by the Sun, Britain’s largest-circulation newspaper, and several polls putting the “Leave” side ahead of “Remain,” created a new level of panic about Brexit.
The British pound dropped1per cent against the U.S. dollar. The yield on British 10-year bonds hit a record low of 1.146 per cent on Tuesday. And the London Stock Exchange’s benchmark FTSE100 Index closed down 2 per cent at 5,923.53 points.
It’s anyone’s guess how much worse it could get should Britain actually vote to leave the 28-member European Union — the world’s largest trading bloc.
“We just don’t know the long-term ramifications of how it will impact the U.K. financial markets, how it will impact trade and how it might impact other members of the EU down the road,” said Rahim Madhavji, president of Knightsbridge Foreign Exchange Inc., a Torontobased online foreign currency exchange.
“That certainly doesn’t bode well for global trade or for Canada either,” Madhavji said.
The rising fear that pro-Brexit cam- paigners might win the day kicked the Remain campaign into high gear this week with dire warning about its effect on everything from tax rates to the price of ice cream.
British Chancellor of the Exchequer George Osborne threatened to raise income and inheritance taxes and cut health and education spending to fill what he predicts will be a £30-billion hole in Britain’s budget following a pro-Brexit outcome.
Canadian Finance Minister Bill Morneau stepped into the fray while in London for meetings warning that thousands of jobs at Canadian firms operating in Britain would be at risk. Some firms that had located in London in order to reach the broader EU market might pull up stakes and move to Paris or Frankfurt, he said.
“We see . . . Great Britain staying in the European Union as the best outcome. The best outcome for Canada, the best outcome for the United Kingdom and the best outcome for the world economy,” Morneau told reporters during the visit.
Brexiteers’ belief the country could renegotiate its own trade deals have been torpedoed by several world leaders. Britain would be “at the end of the queue,” U.S. President Barack Obama said.
Ice cream would cost 30 to 40 per cent more as tariffs snapped back into place, Unilever CEO Paul Polman said in a television interview this week.
Bank of England Governor Mark Carney, a Canadian and former head of the Bank of Canada, has said “a vote to leave the EU could have material effects on the exchange rate, demand and supply potential” and could result in “a technical recession.”
For Canadians, the most immediate impact would be on the value of the Canadian dollar relative to the U.S., said currency trader Madhavji. As investors flee the British pound for the relative safety of the U.S. dollar, Canada’s dollar would fall relative to the U.S. greenback.
That could be good news for Canada’s exports, which will become more attractive to U.S. consumers and businesses — its largest market. But it will make travel to the U.S. and U.S. vacation homes more expensive for Canadians, Madhavji said.
Canadian businesses with operations in London could be forced to consider relocating to the continent. Banks are particularly concerned about what will happen to London’s role as the financial centre of Europe, said Laurence Booth, a professor with the University of Toronto’s Rotman School of Management.
“If the EU decides its currency is not going to be traded in London, you could see Frankfurt become more important,” Booth said.
Major banks that use London as a jumping-off point to serve the rest of Europe are already signalling they may move to Paris or Frankfurt.
HSBC, the largest bank in London, warned in February it could move 1,000 people — about 20 per cent of its investment banking division — from London to Paris if Britain voted to leave the EU.
Canada’s largest bank, the Royal Bank of Canada, has large operations in London.
The Ontario Teachers’ Pension Plan is one of the biggest investors in British infrastructure, including London City Airport, Britain’s High Speed One Channel Tunnel railway link and its National Lottery operator.
The pension plan remains committed to investing in Britain long-term, regardless of the vote outcome, but has concerns about the short-term currency risk, chief investment officer Bjarne Graven Larsen told Reuters.
Sterling has fallen by nearly 10 per cent against the Canadian dollar since the referendum was announced in February.
Brexit also raises potential trade issues for Canada.
Britain has been a natural ally to Canada in several EU trade disputes, including the yet to be ratified Canada-EU trade deal (CETA), says Randall Hansen, a director at the Uni- versity of Toronto’s Munk School of Global Affairs.
“In free trade deals, Britain has been a firm supporter of Canada,” Hansen said, noting Britain backed Canada in its 1990s-era fisheries dispute with Spain over access to the Greenland turbot.
Without Britain’s support, Canadians could end up needing visas to visit any EU countries, Hansen added.
The turmoil could be short-lived if the polls prove wrong, as they did in the 2014 Scottish referendum on independence. It ended in voters supporting the status quo, though by a slim margin.
But if Britain actually votes to leave the world’s largest trading bloc, it could have sweeping repercussions not just for Britain and the EU, but the rest of the global economy. So why do so many want to go? The beer mats at Wetherspoons, a chain of low-priced British pubs, summed it up succinctly: “Vote ‘Leave’ — Take Back Control.” Pub founder Tim Martin announced in late May that he would be issuing 200,000 of the defiant drink coasters — called mats in the U.K. — in support of Brexit.
Reluctant to join a union it never fully embraced, Britain, unlike most other EU members, maintains its own currency, its own monetary policy and its own immigration programs.
But as economic growth stalled and Syrian refugee crisis overwhelmed many of its EU neighbours, British resentment at sending £13 billion a year to Brussels with limited say over how it is spent has grown.
Several observers have compared the British independence movement to the Donald Trump phenomenon in the U.S.
Like Trump, the Brexiteers have tapped into a deep well of anger particularly among older blue-collar workers, who have been left behind in the move to globalization as goodpaying factory jobs fled the country.
“People feel helpless,” said Andreas Schotter, a professor of international business with the University of Western Ontario’s Ivey School of Business.
“Overall, reduced trade barriers benefit the world economy. But it also creates more left-behinds.”
“There’s almost no rational economic or political argument for Britain leaving the European Union. It’s going to pay a serious price if it does. And the problems it thinks it’s going to solve won’t be solved,” Hansen said.
“Personally, I don’t think they can leave. It’s too late. You can’t reverse immigration, you can’t reverse the trade links. You can’t reverse the trend around the world toward homogeneity of regulations,” said Booth.