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What does Brexit mean for New Zealand?

AUTHOR: The Professional Trustee Team

POSTED: 27 June 2016

Those who were watching the polls know Britain's decision to uncouple from the EU was a close thing. Prior to the counting of the votes, many thought Bemain would win the day. That, however, was not the case and now the uncoupling is becoming a reality.

Why did Britons choose to leave what is considered by some to be an institution that creates a stronger economy than Britain flying solo and which serves the British people's interests? Simply because that is no longer the case. Consider this: Britain pays £8.56b as an annual contribution to the EU budget. Add another £336b annually which it costs British companies trading to deal with the red tape imposed by EU laws and regulations. Factor in the unprecedented level of immigration Britain has been forced to accept, resulting in pressure and costs to education, housing, healthcare and welfare, and increased unemployment, often to the detriment of the British themselves.

So what happens now? Uncoupling in any relationship can be a long, drawn-out, messy affair and Britain's withdrawal from the EU will prove to be no exception. Already financial volatility has begun. Markets dropped to a 41-year low and the pound plummeted. Bank of England intervened in the financial markets in an attempt to prevent a crash but it's clear confidence has been lost just as Britain has lost its Prime Minister, Mr Cameron. Many are saying a recession in Britain could begin again. Undoubtedly there will be negative effects on investment, with outflows of capital expected. Reduced demand and consumption will occur and the sterling could continue to fall.

But every cloud has a silver lining if you look for it. In the months (perhaps years) to come, at the macro level, Brexit will give Britain the ability to negotiate and formulate new financial regulations. Opportunities to implement fresh trade agreements with other EU countries will also exist. At a micro level, individuals outside of Britain wanting to buy property in England may find it cheaper as exchange rates become favourable.

What does it mean for New Zealand? We're a very long way from Britain and we can be forgiven for thinking it has little relevance to us. Contemplate, however, how our export market to the UK in beef and lamb, which is tied to quotas to the EU, may be affected. Brexit could cause difficulties getting these products to the markets, leaving the door open for others to supply. Then we have the pound dropping and money looking for a home. Once again, the NZ dollar looks attractive. In fact our dollar has already increased in strength which hasn't helped our exports one little bit. Yet another reason for the RBNZ to cut the OCR this coming August, I'm thinking. Before getting excited at this prospect, however, think about the consequences of volatility in the financial markets experienced over the other side of the world. Money could become more expensive to buy. Consequently, when our banks lend to us, that increased cost may be passed on in the form of increased interest rates, or at the very least, banks won't pass the benefit of a decrease in the OCR to borrowers as they absorb the increased borrowing costs themselves. Maybe we can console ourselves over this dilemma when we take that UK holiday, which due to the pound and euro decreasing, just got a whole lot cheaper.

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© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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