EFFECT OF BREXIT ON THE UK LOCAL AND GLOBAL ECONOMY

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Effect of Brexit on the UK Local and the Global Economy

1.0 Introduction

In 2016, through a referendum christened as ‘Brexit’ at least 52% of Britons voted to leave the Brussels-led bloc. The important occasion resulted in speculations regarding its implications on the United Kingdom's (UK) economy, especially, the banking and finance sector. After the vote, the country experienced low consumer confidence, fluctuation of sterling value and a plunge in stock markets. However, the economy recovered from the short-term implication; currently, financial analysts still reserve strong doubts on the enduring consequences of the exit. The financial industry is one of the most significant contributors of the total GDP providing an accumulated value of 12%, employing around two million people, and lending to EU corporations and states an estimated $1.5 trillion (Tudor, 2016). As a result, this research paper investigates the effects of the UK exit on the commercial and retail banking industry, monetary policy regulations adopted by the Bank of England, and the risks as well as risks management aspects surrounding Brexit.

The vote impacted both the local and global economy since London is a recognized European financial hub harboring both direct and indirect commercial activities. As a sponsor of the single market, the British commercial division experienced significant changes following this historic occurrence. According to Kierzenkowski, Pain, Rusticelli, and Zwart (2016), the European community relied on economic motivations, and so, the post-Brexit focused on banking services. The 2008 global financial crisis significantly affected the retail and commercial banks, making financial analysts providing skeptic forecasts on the vote outcome. For instance, in his study Tudor (2016), explained that specialists claimed that the British exit presented the banking industry with both challenges and opportunities, unique industrial difficulties and high economic uncertainty, which threatened financial activities. The Treasury through the Bank of England (BoE) has aided banks to handle the implications of the UK leaving the bloc, for example, the fluctuation in national currency value due to high volatility.

2.0 Brexit Impact on UK Economy

2.1 Brexit Impact on Domestic Retail Banking

Effects of the Vote on Household Spending and Commercial Investment

            The UK exit influenced both the household spending as well as corporate investment and showed the disparity between the spending levels and investment interests between end-users and enterprises. For corporate institutions, the vote resulted in reduced transactions with the banking sector as the majority of the local businesses avoided pursuing new prospects to monitor the economic changes. According to Dhingra et al. (2017), delayed investment affected the commercial and retail banking institutions despite the 2% growth in local companies after the poll. However, in 2018 the number of new ventures started to reduce depicting a slowdown in the growth of the British economy, questioning the predictions of BoE that had concluded that the economy would grow two-fold following the election. The reduced investment initiatives in equipment and real estate meant minimal financing prospects for financial entities.

            Nonetheless, leaving the bloc had positive impacts on the initiatives of the banking institutions as most of the households maintained their spending levels despite the outcome of the poll. After the vote, Clarke, Serwicka, and Winters (2017) revealed that the pre-referendum projections anticipated an increased expenditure margin among family units. Majority of the British population voted against staying, and so, the realized spending failed to surprise financial analysts as they anticipated an optimistic economic mood. According to the Office of National Statistics in the 2014/2015 annual financial report, a regular Briton family spent around £500 weekly, increasing by 0.3% in the subsequent yearly findings (Scuira, 2017). Ebell and Warren (2016) argued that after the poll the household expenditure increased by over 3% affirming the pre-poll anticipations.  All of these showed an increase in the bank’s transactions and operations.

Influence of Interest and Inflation Rates on Banks

            The British exit proved harmful to the financial sector as BoE reacted to the fall of the pound by cutting interest rates. Through the acquisition of both private and public bonds, the governor increased liquidity levels; however, the rise in inflation affected such efforts. In the study, Measuring the permanent costs of Brexit, Herken, Hayat, Princis, Heijmerix, and de Vredee, (2018) opined that the central bank focused on controlling inflation and implemented a 0.75% interest rate on loans. Usually, banks rely on monetary policies provided by the World Trade Organization (WTO) to stabilize an economy; nonetheless, facing a high cost of living and a weaker currency, banking entities relinquished optionality. After the vote, interest rates became expensive, making financial services unaffordable for the majority of the UK population and small businesses. The reduction in borrowing affected the operations of banks as most people avoided seeking loan services.

Impact of Brexit on Property Rights

            Leaving the EU affected the banking sector as it led to the plunge of property value and prices. A study conducted by the Pricewaterhousecoopers (PwC) concluded that following the referendum that house prices reduced by over 20% (Herken et al., 2018). The drop in prices, as well as the high-interest rates complemented by the high living standards and inflation...