Click to edit Master title style Brexit North American Perspective. Presenter: Glen MacMillan CPA, CA Tax Partner, Adams & Miles LLP Toronto, Canada

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1 Click to edit Master title style Brexit North American Perspective Presenter: Glen MacMillan CPA, CA Tax Partner, Adams & Miles LLP Toronto, Canada 9/8/2016 1

2 June 23, Armageddon is upon us In the days immediately following the Brexit vote, there was a deluge of commentary from across North America about the implications of Brexit. It seemed universally agreed that the sky was falling. Interestingly, most North American commentary on Brexit is dated in the week following the Brexit vote. The volume of commentary has declined substantially since early July and the topic of Brexit is now relatively quiet. 2

3 What the IMF said before Brexit Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility. A U.K. exit from Europe's single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization. 3

4 What the IMF said after Brexit The Brexit vote has caused uncertainty and increased risks to the U.S. economy but thus far it looks likely the net effect on U.S. growth is pretty negligible. The Brexit vote has prompted a rise in the dollar that has been less than feared while stock markets have recovered losses incurred right after the vote. 4

5 U.S. interest rates - before Brexit U.S. Federal Reserve had given indications of two rate increases in the last half of Many economists were expecting a 50 basis point increase by the end of 2016 (25 in September and 25 in December). 5

6 U.S. interest rates post Brexit U.S. Reserve s plans for two possible rate increases in 2016 were, until late August, considered to have been placed on hold. Although the expectation now is that December will be the earliest date of a rate increase, there is renewed speculation of a September increase. Janet Yellen s speech on August 26 th placed no importance on Brexit. 6

7 Foreign currency exchange rates With the uncertainty created by Brexit, investors may move out of the pound and into the safer US$. The resulting appreciation in the US$ could have significant negative implications for American exporters as this will increase the cost of American goods to foreign markets. The decline in value of the GBP seems to be one prediction that has, at least in the short term, held true. 7

8 GBP to US$ exchange rates June to August 8

9 International trade with UK U.S. and Canada are currently negotiating a new trade agreements with the EU. One of the main objectives of trade agreements is to increase economic activity between countries by reducing or eliminating tariffs on imported goods. Will the U.S. and Canada grant the UK benefits of new EU trade agreements, enter into a separate trade agreements with the UK or apply full domestic tariffs to goods imported from the UK? 9

10 Comments of Ben Bernanke, ex chairman of the U.S. Federal Reserve Even more obvious now than before the vote is that the biggest losers, economically speaking, will be the British themselves. (query use of the term obvious to describe future consequences that most agree are entirely unpredictable) Globally, the Brexit shock is being transmitted mostly through financial markets, as investors sell off risky assets like stocks and flock to supposed safe havens like the dollar and the sovereign debt of the U.S., Germany, and Japan. In the US, the economic recovery is unlikely to be derailed by the market turmoil, so long as conditions in financial markets don t get significantly worse: Clearly the Fed and other U.S. policymakers will remain cautious until the effects of the British vote are better sorted out. The biggest risks to financial stability at this point appear to be political - specifically, the risk of further defections or breakdown in the EU - rather than economic. Source: The Economic Implications of Brexit [Ben Bernanke], June 28, 2016, writing for The Brookings Institution 10

11 Stock market fluctuations June and July 11

12 Other considerations Little or no impact expected on U.S. companies that do not currently do business in the UK. Some companies may reconsider future plans for UK business. The UK is America s 6 th largest trading partner; while this is not an insignificant amount of trade, it is unlikely a slowdown in the UK economy could, by itself, significantly impact the U.S. economy. 12

13 Politics before Brexit There seemed to be increasing hype and public interest in the Brexit vote in the days leading up to June 23 rd although there remained an overall feeling that the outcome was never in doubt. The risk of a majority leave vote was underplayed and most (arguably all) mainstream media in North America seemed to assume a leave vote would not happen. Pollsters, pundits and politicians comfortably suggested the British would vote to remain in the EU. 13

14 Politics after Brexit Is the Brexit vote a warning not to underestimate Donald Trump s chances of victory? Similarities noted between the Brexit vote and Trump s candidacy include: possibility of a Trump election win is still not being taken seriously by many. media coverage is almost exclusively devoted to presenting anti-trump viewpoints. Trump supporters are regularly portrayed as uninformed, uneducated buffoons. opposing side has been late to adjust their campaign to reflect the threat of a Trump win. 14

15 Canadian perspectives Expansion into the UK: Tim Hortons (Canada s largest coffee and donut chain) has confirmed its intention to expand into the UK. No significant concerns expressed publicly about Brexit. 15

16 Canadian perspectives Quebec separation from Canada: Comparisons between Brexit and the ongoing issue of Quebec separation were inevitable. A new term Quebexit was coined and triggered collective groans of separation fatigue across English Canada. Separatists are watching future Brexit developments closely and hope to someday say separation was good for the British and it ll be good for Quebecers. 16

17 Canadian perspectives British monarchy in Canada: The Queen is still technically Canada s head of state although her role has for a long time been ceremonial. Though the Queen enjoys an enormous level of personal popularity in Canada, ditching the monarchy is a political goal of many Canadians, especially French speaking Quebecers. Anti-monarchists raise an interesting point: If UK citizens reject the notion of being ruled by foreigners located in another country, why should Canadians feel any different about the British monarchy? 17