How Does Brexit and Other Free Trade Changes Impact Your Bottom Line?

brexit fallout

On June 23rd, British voters chose to leave the European Union, rocking global financial markets. While the full process of disengagement from the European Union could take years, "Brexit" has raised a number of near and medium-term risks that could impact your company’s bottom line. From currency fluctuations to increased barriers to trade, here five things your controller services should be considering:

1. Currency Fluctuations

The moment that Brexit was official, the British pound plummeted to its lowest level in more than three decades. Since June, the pound has fluctuated widely and could either continue to weaken or regain lost ground, depending on your view. Any assets on your books denominated in GBP will be difficult to value in the near-term as political developments in the U.K. or E.U., and the economic consequences thereof, could spark more violent currency swings in 2016.

2. Low Near-Term U.S. Interest Rates

Right now the market is beholden to the Fed and the “will they or won’t they?” debate about possible interest rate hikes. While U.S. economic data has been generally positive, the Fed is clearly worried about economic weakness in China and Europe. Brexit appears to have discouraged the Fed from raising interest rates in the near term, and weak U.S. July retail data raises doubts about whether there will be any rate hike at all in 2016.

As a result, U.S. companies can still borrow at record low rates, probably all the way until the fourth quarter of 2016.

3. Potential Tariffs on U.K.-E.U. Trade

In a post-Brexit world, the U.K.’s relationship with the E.U. common market remains uncertain. According to some studies, remaining within the common market boosts U.K.

GDP by 4 percent. However, it is unclear what level of access U.K. firms will have to the common market in the coming years, and the E.U. may erect tariffs or other punitive measures that could impede cross-Atlantic trade. Any tax or regulatory measures that create trade friction will impact revenue, though U.K. firms now have more freedom to explore new partnerships in Latin America or other key emerging markets.

4. Weak Business Confidence in the U.K.

U.K. firms have adopted the same attitude following the Brexit as many of their foreign counterparts: wait and see. While recent U.K. consumer spending data has been positive, the Bank of England released data last week suggesting that many local firms plan to postpone hiring and expansion plans in this uncertain environment. If your balance sheet is dependent on economic growth in the U.K., the next 12 months are likely going to require some downward adjustments.

5. U.K.-Based Staff May Have to Relocate

Prior to Brexit, London was Europe’s undisputed financial hub, hosting offices from every major bank and investment firm. Banks enjoyed a pro-business regulatory atmosphere and were a stone’s throw from the E.U. common market. Uncertainty about the U.K.’s future relationship with the E.U.

may mean that banks decamp for Paris, Frankfurt or Dublin, to name a few alternatives. Scattering staff all over Europe will force bookkeeping services to contend with a whole host of different tax and withholding requirements, particularly if staff travel frequently.

Brexit was not the economic calamity that many commentators predicted, but the fallout from the vote may not be fully realized for years. Companies with global operations may find that their international footprint becomes harder to manage when the free flow of trade starts to shudder. The only thing that is certain in 2016 is that volatility in the financial markets (and on spreadsheets) will continue.