Now What? Does Brexit Mean What We Thought It Would?

by Chris Kuehl, managing director, Armada Corporate Intelligence

It has been more than a month, and the pundits from the various global think tanks have waited long enough for their opportunity to weigh in. The consensus view is that the Brexit has been a bad thing in the short term and likely in the medium term, but the long-term impact is much harder to estimate. The immediate impact of the Brexit has been a slowdown in the UK economy that will likely drag the overall GDP numbers down by at least one point – at least that is the assessment of the IMF in its latest analysis. That is consistent with what has been presented by the World Bank, the OECD and others. The EU is convinced the decline will be even steeper – closer to three points – and in the UK, the analysts are generally in the two-point drop category.

The impact on the US was immediate and not quite as destructive as had been originally assumed. The most direct influence was from the change in the value of the currency. The British pound fell to a 40-year low, and the euro tumbled as well. This made the US dollar that much stronger, and this was assumed to be disastrous for the US exporter. The data that have come in since the Brexit showed that there was indeed a decline in demand for US goods – especially from the UK and Europe – but, not as much as had been assumed.

It seems that there are other reasons to buy from another nation aside from the value of the currency. It is certainly a disincentive when one has to pay more for a product due to the fact one’s currency is weak, but the demand for the product may be great enough to offset the higher costs. Much of what the US manufacturer sells is unique and in demand. There are no ready substitutes and, therefore, no alternative to paying the higher costs. The US has simply not lost as much export momentum as assumed. The most significant impact on US sales abroad will be the result of a slowing British economy, as the country has been a big trade partner for years. The loss of economic momentum in Europe and the UK will likely hurt more than the strengthening of the dollar.

German and French business confidence is down, and the EU in general still seems somewhat in shock. The US doesn’t expect much of an immediate impact, but is keeping an eye on the middle and later estimates. It may be to the benefit of the US if the British elect to trade more with the US, but that advantage could be lost if the Europeans get angry and, in response, shift their emphasis more to Asia. That seems unlikely at this stage, given the importance of the US market, but all will depend on the way that negotiations proceed. The pro-Brexit forces in the UK asserted that all would be well because the US would step in and buy more from them. The problem is that the US mostly imports things the British do not sell. The US imports oil and commodities, such as industrial metals. The US makes the same things that British industry makes and that limits demand. The major trading partners for the US are Canada and Mexico, and that is not going to change.

There are many moving parts here, and the key will be the extent to which emotions can be kept out of the talks. The British have placed pro-Brexit leaders in position as chief negotiators and that could be a bad move if they behave as pure ideologues and cooperate not at all with the Europeans. If they do so, they will be charged with the failure and any negative outcomes, so they will be better served by getting a decent agreement. As pro-Brexit, they will be less likely to be attacked by the UK voters for not trying. The Europeans also seem to be putting hard liners in charge. It is likely to be a set of talks that look extremely acrimonious on the outside while deals are cut quietly.

The US wants to position itself as an arbitrator and has urged cooler heads to prevail. This may indeed be the case as many in Germany and France have backed down from their more strident positions, but the US is not seen as a real neutral in this situation. The US is very likely to play the role of dispassionate outsider willing to work with anybody and everybody, but the Europeans see the US as far closer to the UK. One very interesting theory going around asserts there will be a triumvirate of sorts by the end of the year. Will having female leaders in the UK (Theresa May), Germany (Angela Merkel) and possibly the US (Hillary Clinton) provide a unique opportunity? This puts far too much emphasis on cooperation based on gender when none of the three has been a champion of this approach. There are few leaders in the world more nationalistic than Merkel, and Theresa May is a devoted British Tory. Even Clinton has always kept her distance from “woman’s power,” except in the campaign moments.

The bottom line is the Brexit process will take the full two years that are provided for in Article 50, and it now appears that negotiations will be careful and drawn out. The British will not lose access to Europe, as they will still have their membership in the World Trade Organization. The major issues will be working out compromises that satisfy the EU and the British public. The impact on the US will depend on two factors – how long the dollar stays high relative to the other currencies and the extent to which trade patterns shift. The UK will be more reliant on the US, but that is not going to be a major issue in the US. For the moment, this can be seen as a European issue with only tangential relevance to the US.

Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada began as a competitive intelligence firm, grounded in the discipline of gathering, analyzing and disseminating intelligence. Today, Armada executives function as trusted strategic advisors to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations. For more information, visit