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Brexit deal crushed: This is what it means for Australia

<em>Photos: AAP, Getty</em>
Photos: AAP, Getty

British Prime Minister Theresa May has had her Brexit deal overwhelmingly rejected by British MPs, throwing an already wobbly EU into more uncertainty.

But the uncertainty doesn’t end at European shores.

Australian winemakers have been stockpiling supplies across European warehouses in preparation for a no-deal Brexit, the Australian Financial Review reports. Britain is the hub for Aussie wine exports to Europe, which means the Australian wine industry would suffer a major hit from an adverse Brexit decision.

And the Meat and Livestock Australia organisation warned last year that a disorderly Brexit poses a range of risks to Aussie red meat exports.

Today, in the wake of the historic defeat, economists and experts are taking a new look.

We need to focus on steady trade: Trade Minister Simon Birmingham

Senator Birmingham said Australia will attempt to maintain steady trade with Britain following the defeat, and described these as “extraordinary and uncertain times” to ABC Radio National this morning.

“It could lead in any number of directions it seems from here, with just 73 days to go now until the scheduled date for Brexit to take effect,” he said.

Minister for Trade Simon Birmingham in Singapore on Tuesday, November 13, 2018. <em>(Photo: AAP/Mick Tsikas)</em>
Minister for Trade Simon Birmingham in Singapore on Tuesday, November 13, 2018. (Photo: AAP/Mick Tsikas)

Australia will continue to focus on securing free trade agreement (FTA) deals with the UK and the EU regardless of Brexit, he indicated.

According to the Department of Foreign Affairs and Trade website, Australia’s FTA with the EU is “under negotiation” while its negotiations with the UK are categorised as “prospective”.

Trade critical, but I can work with either leader: Opposition Leader Bill Shorten

Shorten added that while the uncertainty was a definite negative for British people, Australia needs to keep its eye on trade opportunities.

With an Australian federal election around the corner, Shorten said that if elected, he could establish a working relationship with either May or Opposition Leader Jeremy Corbyn.

“I think what we’ve got to do is make sure we maintain good relationships with Europe and with Britain, and we and get the advantages we can for our businesses,” Shorten told the Nine Network.

This hasn’t had a massive impact on markets: the ASX

The Australian share market has opened flat with finance markets pulled in different directions. Optimism about the Chinese economy has been offset by Brexit gloom.

This vote doesn’t change things for Australia: AMP Capital chief economist Shane Oliver

While it’s major news, the MP vote will actually have little impact on Australia, Oliver told Yahoo Finance.

“It just leaves us where we were before; Brexit is still possibly happening but the uncertainty is to how that will pan out,” he said.

“If anything, it actually increases the chance that the Brexit outcome – if it does occur – is a soft Brexit because it’s likely that May will win the confidence vote tonight and she’s already indicated she’ll reach out to a lot of parties to work out a cross-party solution.”

AMP Capital chief economist Shane Oliver. <em>(Photo: Supplied)</em>
AMP Capital chief economist Shane Oliver. (Photo: Supplied)

Oliver noted that UK parliament is a lot more pro-Europe than the referendum was, with the majority actually supporting a decision to stay in the EU.

Given this, Oliver predicts it will lean towards a pro-Europe soft Brexit or another referendum.

“So for Australia, there’s always the hope we’ll have a free-trade deal with the UK, if there’s a no-deal Brexit.

“But I think ultimately this is heading towards some sort of softer Brexit where the large degree of the UK remains within the customs union so that may make it harder for Australians to negotiate with the UK. But it’s all still up in the air.”

The customs union is an agreement allowing partaking countries to set common external tariffs.

Australian investors needn’t worry – but a British recession could sting: BetaShares chief economist David Bassanese

Mirroring Oliver’s comments, Bassanese sought to allay investor fears about the uncertainty: these days, the UK is a “diminishing factor” in trade.

“Although ongoing Brexit uncertainty poses huge risks to the UK economy, the good news for Australian investors is that … Australian exports to the UK were worth around $4.5b late year, or only 2.5% of the total,” he told Yahoo Finance.

“As such, Brexit itself is unlikely to shake global growth or global equity markets, but it is having some impact on the British pound in currency markets.”

In saying that, however, the UK is a “reasonably important” source of foreign investment, accounting for 10 per cent of foreign direct investment and around 15 per cent of total investment flows in 2018.

“In that sense, there is a risk that a major downturn in the UK economy could see some curtailment of investment in Australia, though the impact on trade flows should remain low.”

The debate is now about the manner of Brexit: Fidelity International UK equities portfolio manager Leigh Himsworth

With a no-deal Brexit beckoning, Himsworth noted that May now has only three days to come up with a plan B amid an uncertain political situation.

Corbyn has tabled a motion of no-confidence, set to be debated in Parliament today.

Observing this, Himsworth said the debate comes down to how Britain achieves a full exit from the EU.

“This will either be a no-deal ‘crash-out’ or one that may happen over many years. Each has pros and cons. The ‘crash-out’ is potentially highly disruptive but gives certainty on what the UK faces and allows subsequent negotiation of trade deals, movement of people and so on.

“This could result in an immediate fall in sterling, but then a rebound as companies are forced to re-adjust quickly. The latter, an elongated exit, may result in a stronger sterling initially but prolong the uncertainty, resulting in falling investment and concerns about the ability of the corporate sector to make longer term plans.”

EU offer was a bad deal: Alexander Downer, former Australian High Commission to the UK and Liberal Party politician

In a tweet, Downer indicated that the EU’s offer to May would have injured Australia’s chances of securing a free trade agreement with the UK and called on the EU to revisit the backstop decision.

Speaking to the ABC last night, he added that a hard Brexit could actually allow Australia to negotiate a better trade deal.

“We may be able to negotiate much better access to the British market than we have, so we might be able to sell some beef and sheep meat, possibly dairy products into the UK, which we can’t sell at the moment or we barely can sell at the moment because of the restrictions on exports of agricultural products to the EU,” he argued.

The uncertainty is bad for Australian companies: 4D Infrastructure global equity strategist Greg Goodsell

Goodsell agrees with Himsworth, noting the extreme uncertainty in Britain today.

“In the immediate future there is the no-confidence motion in Theresa May which will be held tomorrow in the UK. Over the medium-term it is very difficult to say where the Brexit issue will go but a fresh election or referendum is not out of the question,” he said.

“For the UK more generally, the level of uncertainty can only be bad for consumer and investor confidence which is detrimental for the economy.

This is where the impact could be felt in Australia with companies who have a significant component of their earnings sourced from the UK. More longer-term, if the UK does finally exit the EU then it becomes a potential new trading partner for Australia.”

The free movement of workers is of critical importance: Bailador Technology Investment co-founder David Kirk

“Uncertainty is never good for sales as clients sit on their hands waiting for clarity on which way regulations and the economy are heading. Information technology companies have the benefit of selling electronically delivered products so there are no logistics or physical border problems.

“The free movement of people is always a concern for tech companies. The best talent is globally mobile and hard to find. If the UK restricts the inward flow of developer talent from Europe that will not be good.”

It could be time to look at hedging through the VIX index: T3 Index CEO Simon Ho

Echoing AMP Capital’s Shane Oliver, Ho said the vote doesn’t mean very much right now.

“The US market was up over night, and nothing has happened since the vote so I think people were kind of expecting this.”

“One thing I will note about the VIX market in general though is that if people want to bet against it… the price of VIX options is at an 18-month low so it’s a very opportune time – if someone thinks something is going to happen – to use VIX products to hedge themselves.”

The VIX index is also known as the fear index as it measures volatility.

Aussie businesses with UK operations should be on the alert: Saxo Banks’ Australian market strategist Eleanor Creagh

Speaking to Yahoo Finance, Creagh said the final outcome for Australia is largely dependent on how the EU and UK decide to Brexit.

“The latest developments have not offered up any form of clarity on the final outcome, so at this stage the effects on global markets are muted. But Australian businesses with operations in the UK will not escape the economic uncertainties and inability to make decisions about the future that have arisen from political paralysis.”

Australia’s GDP growth is largely driven by exports, so trade agreements with both the UK and the EU are also critical, given the EU’s position as a 508 million-person export market.

“The EU is Australia’s second largest trading partner surpassed only by China, with the UK accounting for around one third of those exports. The decision to begin negotiations on a free trade agreement [as Australia has done] with the EU reflects that strong relationship.”

And even your music could be affected: Beggars Group music labels

The largest group of independent labels in Europe, Beggars Group has reignited its warnings that a Brexit could have devastating impacts on the British music industry and local artists, as revenues from the EU are a “critical element of business”.

“Therefore, it is of some concern that the arrival of Brexit may hold back further growth,” they said in a note last year.

So, a Brexit vote could even affect the amount of new music and artists coming out of the UK.

What’s next?

May will likely win the vote of no confidence – but nothing is a sure thing: CBA senior currency strategist Joseph Capurso

In a research note, Capurso outlined a number of scenarios that could happen, with the current government winning the vote of no confidence as most likely thanks to the support of the ten seats from the junior coalition within the government and the Democratic Unionist Party.

“We also expect the Conservative Party members, even the ardent Brexiters, will vote for the government out of self-interest,” Capurso added.

“Under this scenario, we expect PM May to stick with her two pronged plan to seek greater support in the House of Commons for her existing Withdrawal Agreement and seek concessions from the EU.”

But May could decide to call a second referendum on Brexit. If she does so, she’ll likely ask the EU to push back the current exit date of 29 March, even though she’s ruled out a delay thus far.

Commonwealth Bank senior currency strategist Joseph Capurso. (Photo: Supplied)
Commonwealth Bank senior currency strategist Joseph Capurso. (Photo: Supplied)

What if the government loses the vote of no confidence? “May would probably resign, though that is not guaranteed.”

According to the law that governs the no confidence process, parliament has 14 days to form a government that can win a vote of confidence. And if no government is formed, led by either the Conservatives or Labour, Parliament will likely be dissolved and an early general election will be called.

Under the uncertain circumstances, a ‘hard’ Brexit – where the UK leaves the EU without a Withdrawal Agreement and trades with the EU on WTO rules – is still possible, Capurso noted – but it requires Parliament to approve of such a clean break with the EU.

“But trade between the UK and the EU could be severely disrupted for at least several months while new stop-gap trade arrangements are implemented.

“A recession in the UK would be possible under a hard Brexit because formal trade agreements can take years to agree.”

More to come.

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