Unexpected Brexit Vote: What does this Mean for Canada?

Brexit_ What this means for Canada

In case you missed it, a majority of British voters decided that the United Kingdom should leave the European Union, sending Prime Minister David Cameron out the door and the British pound down the drain.

Despite warnings of Brexit’s dire consequences, fears over unbridled immigration and the U.K. losing its sovereignty through rules and regulations imposed on it by Brussels, ultimately carried the day following the June 23rd referendum.

From this point, things can only get more complicated as nationalist and protectionist forces in other EU countries begin to wonder about whether this is a feat that can or should be duplicated.

Investors Shaken by European Turmoil

Stock prices around the globe moved wildly throughout the day Friday, echoing a surprising vote that polls failed to predict and markets failed to price accurately.

Major U.S. markets tumbled 3.5%, dropping into negative territory for 2016. The S&P/TSX composite fared a bit better, but was still off 1.8% by the end of the day.

Investors hate uncertainty and the result of the referendum has given them plenty to worry about, driving them out of the British pound and into currencies that are perceived as being safer – like the U.S. greenback – thus putting a sharp dent in our own dollar.

Meantime, the loonie was off by more than 1.8% against its American counterpart on Friday and it’s likely to stay there for a bit, hampering a host of Canadian companies.

Strength in the U.S. dollar is bad news for Canada’s oil producers. Since oil is priced in greenbacks, strength in the U.S. currency is likely to lead to more commodity weakness. In turn, this also raises the chances of a Bank of Canada interest rate cut in the near term. (The next Bank of Canada meeting is on July 13th.)

On the other hand though, the surprise vote could provide a window for investors that see long-term opportunities, since impulsive reactions in the face of such market volatility often backfire.

Related Read: Four ways to weather a Bear Market.

Nothing ever Really Happens Overnight

The earliest Britain could leave the EU is two years from now. To do that, it would have to invoke Article 50 of the Treaty on European Union. This would force the EU to start negotiating just what access the UK, as a non-member state, would ultimately have to the rest of the European market.

But that’s not likely to happen anytime soon as Cameron has stated that he plans to leave that option and the Pandora’s box it’s packaged in to his successor. That means it could be as far away as 2019 before Britain actually leaves – still, it will be going.

How will Brexit Affect Canadian Businesses?

Bank of Canada governor Stephen Poloz has long warned that unexpected global events can destabilize a weakened Canadian economy. This vote definitely qualifies as unexpected.

With a common – albeit increasingly distant – heritage, Canada maintains close business ties with Britain, with cross-ownership of companies and wide investment in each other’s countries.

Canadian corporations invest in U.K. operations largely so they can more easily access the free-trade corridors Britain enjoys with its EU partners. Now, some of these companies may need to bypass London, currently the continent’s financial hub, to more easily access the rest of Europe. That means upheaval, higher administration costs and reduced profits.

Related Read: Mark Carney named Bank of England Governor.

How will Brexit Affect Individual Canadians?

The UK is one of the most popular destinations for Canadian travellers and Britain’s exit is clearly going to affect the plans of Canadian travellers who were hoping to visit there – or anywhere in Europe for that matter.

While a lower Canadian dollar is going to cost you while getting there, the travel industry across Europe will be working hard to convince potential visitors that all is well. Expect to see “don’t worry, be happy” deals starting to pop up soon.

But, for many Canadians, it will ultimately be harder to get around Europe than it once was. The UK accepts dual citizenship, which means those of British heritage may carry both British and Canadian passports if they choose – and many do.

For example, one friend of mine uses her British citizenship to regularly trek across Europe, confident that she’ll have access to the same health care and social services as other EU citizens. Until now at least, she could travel anywhere within Europe without restriction – but that’s going to change.

There are other unknowns, too – including the status and reduced salaries of Canadian workers abroad, thousands of whom (one being my daughter who is a teacher) live and work in and around London in particular.

Something that’s more of a worry to retirees will be whether or not their government pensions will continue to be indexed to inflation. At the moment, UK citizens who live in the EU see their government pensions go up every year because the “single market” concept takes precedence.

With the vote to leave, the UK government will now have to decide whether to continue this practice or treat pensioners as they are if they retire to Canada, for example, where their pensions are frozen upon departure and no longer protected from inflation.

Any way you cut it, the European effort to promote political union through economic integration seems to be in trouble. It’s just not yet clear how much.

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Economic News / Personal Finance / Personal Finance News / RSM News

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