Britain’s vote to leave the European Union adds a heavy dose of uncertainty to a global economy that is still trying to heal from the global financial crisis.
The most immediate effects will be felt in Britain. But economists say the ripples could be felt much farther afield.
Companies will wonder whether to invest or locate in Britain during the years-long negotiations to define new trade conditions with the EU, its biggest business partner. Across Europe, trade and immigration may lose ground to nationalism and protectionism. The EU itself, minus free-market oriented Britain, may turn to more government intervention and regulation. Other countries may eventually seek to leave the bloc.
“A new set of economic circumstances has been created, which the world will have to deal with,” said India’s Finance Minister Arun Jaitley. “Volatility is the new norm. And therefore, economies have to learn to live with crisis after crisis.”
The global economy isn’t in a crisis, but growth is muted and uneven among countries. The International Monetary Fund forecasts growth of 3.5 percent for this year. The Chinese economy is slowing, the U.S. recovery has hit a rough patch, major emerging economies like Brazil are in recession, and Europe and Japan are stagnating.
That’s not good enough to bring people out of poverty of get them jobs. Unemployment remains at a high 10.2 percent in the 19 countries that use the euro; in the U.S. it’s a lower 5.5 percent, but the labor participation rate has not recovered since the recession of 2008-9, indicating many workers have not benefited from the stronger U.S. recovery.
UK ad industry response
The UK industry was staunchly in favor of staying in the EU and campaigned vigorously to support that status quo.
As for how the historic vote will impact the ad and entertainment communities, UK advertisers association ISBA issued a statement in response, calling for calm and careful deliberation regarding how to proceed. ISBA stated that the vote to leave the EU after 43 years “should not result in rash or sudden decisions by advertisers, agencies or media.”
Ian Twinn, ISBA director of public affairs, stated: “First, this is a decisive result reflecting a call for change. Secondly it is not clear what change will look like in the short term or the final new relationship with Brussels. The UK ad industry remains strong as a global player and we are confident that this vote provides significant opportunities as the dust settles. We now start a two year period whilst we agree with Brussels what our relationship will be. There will be a great deal in terms of advertising and consumer law that came from the EU that will remain in UK law. Whether pleased, surprised or saddened by this vote to leave Business should do what good and successful business does. It is business as usual, we are in the EU for at least two yrs and may be longer. Rash decisions in business or politics rarely pay off.”
Film funding/incentives
Financial support from the Media Program, the EU’s funding arm for the film, TV and digital media sectors, will likely come to an end in the UK. This financial backing was substantive on the distribution (some $44 million for British Films distributed in other European countries in 2014 and ‘15), and production fronts.
On the flip side, a strengthened dollar when stacked against a falling euro and pound could make it less expensive for other countries to come to the UK to shoot. However, the UK already has strong filming incentive packages in place, and it’s uncertain how leaving the EU will impact policy and the nature of those financial incentives designed to attract production from the U.S. and elsewhere.
Even more uncertain is whether the ripple effect of the UK vote will lead to other countries exiting the EU, which could dramatically change the business landscape relative to entertainment and advertising across a giant swath of Europe.
Uncertainty is already being felt in financial markets. At press time, in the aftermath of the Brexit referendum, the Dow Jones average was down some 400 points.
Economic growth
The most direct economic pain will be felt by the U.K. and Europe. Research analysis group IHS Global Insight cut its U.K. growth forecast to a bare 0.2 percent for next year, from 2.4 percent. The eurozone economy will lose some 0.3 percentage points, and twice that if a new trade agreement isn’t quickly reached, said economists at ING DiBa.
The direct consequences for the world economy are likely to be more moderate. Moody’s Analytics estimates that global economic output would be 0.25 percent smaller after five years than it otherwise would have been, while the EU would be a full percent smaller and the U.K. 4 percent.
Businesses
Many big companies use the U.K. as a base for their European operations. London’s strength as a banking center is in part based on easy access to financial markets in Europe. Regulatory approval to do business in the British capital means an all-access pass to the other 27 EU countries, a process called passporting.
Global banks like JP Morgan Chase have already said that they would have to move jobs from London to the European mainland if Britain leaves the EU. New borders could also raise the cost of business, though exactly how much is hard to tell.
The impact on trade could be lessened by a civilized divorce. Britain could wind up like Switzerland, which simply adopts EU regulations without having any say in how they are decided. But the price for that might be allowing free movement of workers. A desire to control immigration was a major force behind the “leave” campaign, so it’s unclear if such an agreement could ever be reached.
“If the U.K. takes a tougher stance on immigration, for businesses this will be a disaster as the EU will retaliate,” said Christian Stadler, professor of strategic management at the Warwick Business School in Coventry, Britain. “Access to the EU will become difficult. For some companies this means doing business in Europe won’t be attractive anymore.”
“Others will have to deal with complicated bureaucracy,” he said. “In short: a nightmare.”
Global trade
The British vote have a much broader impact if becomes a turning point away from trade and economic integration.
Many think it could embolden anti-EU, anti-immigration political movements such as the Front National in France. Its leader, Marine Le Pen, is already considered likely to make the final round of presidential elections next year. Geert Wilders, head of the anti-Islam, anti-EU Freedom Party in the Netherlands, called Friday for a referendum on the EU there, too.
And it goes beyond the 28-country free trade bloc in Europe. Donald Trump, the likely Republican nominee for U.S. president, has described the free trade agreement among Canada, the U.S. and Mexico as “a disaster.” Likely Democratic nominee Hillary Clinton has said the U.S. should “renegotiate deals that are not working for Americans” and if necessary reject a proposed trade deal with Asian countries if it doesn’t show clear benefits for raising wages and jobs.
“In the US there is a clear parallel between the rise of Donald Trump and what is going on in the U.K. and the rest of Europe,” said Rob Carnell, U.S. economist at ING-DiBa. “The recovery has left large swathes of the population behind, and this is their protest.”
“I think this vote has been a vote against open and integrated societies, quite frankly,” said Guntram Wolff, director of the Breugel think tank in Brussel. “And I think the sentiment in many other European countries…would be to say, we will not counter that, we are so fearful, that we will basically try to counter populism by following the same road and be more protectionist.”
Wolff said the British referendum was a vote of no confidence in the Western world’s drive for more open trade.
“I think it’s a turning point for the globe,” he said.
AP Business Writer Joe McDonald in Beijing, and SHOOT’s Robert Goldrich contributed to this report.
