Brexit's Impact On Australian Small Businesses
Britain has shocked the world with its Brexit vote, plunging global markets into chaos and reviving the spectre of a new global recession less than a decade after the Global Financial Crisis.
Only days after nearly 52 per cent of British voters marked the “leave” box on the ballot papers, there have been numerous difficult questions, but no clear answers, as to what will happen next.
Global markets went into meltdown after the result became known, with sharemarket values plunging and currencies gyrating from London to Sydney. But was that just a knee jerk reaction or a forerunner of things to come?
The only certainty would seem to be a period of uncertainty, and unfortunately that is one thing that investors and markets dislike more than anything else.
Uncertainty heightens risk, undermines confidence to lend, borrow, spend and invest, and destroys asset values and growth.
For Australian businesses, what does this post Brexit world look like?
The Australian economy is at the end of an international chain reaction over which it has little immediate control, with Australian businesses seeking to ride out any waves as safely as possible.
While less than 4 per cent of Australia's goods are exported to the UK and 5 percent to Europe, the Brexit shock has subdued investment expectations and is likely to make the world that Australia lives in a slower place to do business.
Will that have an impact on demand from China for Australian commodities such as iron ore, one of the main drivers of the economy?
The mining services business in Western Australia, for example, was booming on the back of the world commodities boom several years ago, but falling demand for iron ore created major problems for many SMEs who had previously enjoyed rapid growth.
Japan is another big market for Australian commodities, and already Brexit is having a knock on effect there.
The Japanese yen surged after the vote as investors sought safe havens, and there is concern that could de-rail an economy where regulators have already resorted to negative interest rates in a bid to stimulate growth.
Although the Australian dollar dipped on the day of the Brexit poll against the US Dollar, falling around 3 per cent, the longer-term trend for the currency could be upwards.
This would negatively impact exporting SMEs in industries such as agriculture, wine, and also cut revenues for the burgeoning number of SMEs exporting professional services to the world.
In a scenario where the US Dollar is rising against both the British pound and the Euro, the US Federal Reserve is likely to defer any interest rate rises. That would be a decision that, in turn, could create pressure for the Australian dollar to appreciate.
Even though there is otherwise no compelling argument for doing so, a rising Australian dollar will make the Reserve Bank think of another cut in official interest rates, which are already at record lows.
Lower interest rates would continue to have an impact on the Australian property market, creating conditions for prolonging the bull market of the last few years.
But the lower rates would only come through to the property market if Australian banks passed on the official rate cuts.
Another consequence of Brexit would be a rise in borrowing costs on global debt capital markets, some of the same markets where Australian banks regularly source their funding.
Another of the many question marks is how those markets would price Australian bank debt.
For most ordinary Australians, the fear is that Brexit will hit the value of their retirement savings in the same way as the GFC did almost ten years ago.
With global investment markets in turmoil, and Australia not immune, superannuation balances will come under significant pressure at least in the short term, and possibly longer.
Unlike the GFC, Australian investors won’t have the option of putting their savings into bank term deposits at around 8 per cent in the current low interest rate environment.
Much of the Brexit impact in Australia will be on that intangible quality called sentiment.
Even if there are no direct and obvious economic impacts, the global uncertainty has the potential to dampen sentiment among Australian consumers and investors, creating conditions for slower growth.
This combination of outcomes is an aggregate of all the likely negative outcomes from Brexit, and the hope is that the reality is a softer landing.
Brexit may or may not ultimately prove to be another so-called “Black Swan” event, on par with the collapse of Lehman Brothers investment bank in 2008, which triggered the GFC.
But in the aftermath of the vote, it is certain that the world has changed forever, but by how much remains will be revealed in the second half of 2016.