Effects Of Brexit On UK And Australia Economy And Exchange Rate

Impact of Brexit on UK Economy

Brexit is the on- going agenda in Europe that has become a serious factor for Britain. The government of UK decided to separate from Europe with the assumption of higher growth but it is adversely affecting the economy of UK (The guardian, 2017).  There were some assumptions of the Britain government behind this decision. Some adverse results occurred for Britain. The first and foremost impact on the economy of Britain is the devaluation of pound against dollar. Pound has gone down against dollar after the hard core brexit decision of British government. Yet it decreased almost by 20% (Woodford, 2017).  In October 2016, the value of pound was 1 pound against $1.55. Currently, it has come down to $1.247.

Along with this, Brexit has affected the trade and manufacturing sector of the Britain and other counties as well. The export has decreased. It is because most of companies in UK are just surviving because of European Market. Around 63 percent British companies selling their most of the products and services in European market (The guardian, 2017). Now the manufacturing and trade companies largely depend on how good relation and trade agreement Britain has with European Union. Apart from this, the economic condition of Britain has influenced due to Brexit and FDI to country has decreased in current year.

Furthermore, it directly impacted on the growth of the companies by decreasing their sales. After leaving European market, half market of the British companies has already become as export market and remaining market is suffering recession. The purchasing power of the customers has decreased that in turn led to the demand of products or services to be down (FRB, 2017). The per capita income of people has really gone down, which is greatly affecting the growth factor of companies and indirectly to economic growth. Decreased production gives result in decreased GDP rate of the country.

Exchange rate is the value of currency that is used in international market to compare with other currencies. Moreover, exchange rate can be said as the value of one currency against other currency. Exchange may be fixed, variable, and managed exchange rate. The variable or flexible exchange rate is determined by the demand and supply of the currency in the market (Gopinath et al, 2014). The AUD is determined in the same way as its value is determined by the demand and supply factors of the market.

Factors Influencing Exchange Rates

From the above diagram it is very clear that when the demand of the when the supply of currency increase then the demand of currency decrease that push down the value of currency. There are several factors which affects the exchange rate of any country. These factors are speculation, export and import condition, inflation rate, interest rate, government debt, FDI, political stability or condition and recession (Gopinath et al, 2014).These factors affect demand and supply the currency that in turn creates fluctuation in the value of currency. Many of these factors affect the exchange rate of AUD. The Australian dollar is very sensitive to fluctuation in its demand and supply in the market both domestic and international. The most important factor that affects the currency rate of Australia is the interest rate. RBA undertake to change in the interest timely based on the need of urgency. If RBA decrease the interest rate, it increases the supply of AUD in Australia that bring down the internal and external value of currency because excessive supply increases the expenses of people that led them to import as well.

Along with this, Australian economy is also said to be mining economy as Australia largely depends on mining businesses. The mining boom-declining in the economy over 10 years has influenced the value of AUD. Mining has become the cause behind the fluctuation in the value of AUD (Davis and Martlock, 2016). Apart from this, the budget announcement put impact on the value of UAD. If the budget shows deficit, it definitely leads value of AUD to be lower or to go down and if the budget shows surplus then value of AUD is driven up.

Apart from this, the Brexit is also affected the value of Australian dollar. It was heavily decreased against USD to 73.26 percent from 76.06 US cent. Australian companies trade in Europe therefore brexit segregate the market into two markets (Davis and Martlock, 2016). Therefore, after leaving Europe, the economic condition of UK was down that affected the trade of Australia, which in turn affected the exchange rate of Australia.

Pound to AUD since last three years:

Source: (RBA, 2017)

Average Exchange rate Pound to AUD:

The value of Australian Dollar is moving up and down since last few years. But from the above data of three years, it is clear that the Australian Dollar is sensitive to demand and supply and other factors determine the value of currency. The average exchange rate of AUD in 2014 was 0.547 AUD against one pound. It decreased in 2015 to 0.49 due to economic declination of other economic factors. But in 2016, it was increased up to 0.55 AUD (RBA, 2017). From the data gathered above shows that how the exchange rate of Australia responded to pound after during brexit period. The value of Australian Dollar was definitely influenced by the brexit. The pound fell down against dollar after this hard brexit (The guardian, 2017). The continuous increment in AUD to Pound but decrement in November and December of 2016 make it clear that the value of pound against Australian dollar decreased during the period of brexit.

Australian Economy and Exchange Rate

However, there are number of factors other than brexit that leads AUD to change or move up and down. These factors are interest rate, mining sector, inflation, speculation, global recession, housing market and other factors affected the exchange rate of Australia (Frieden, 2014). The interest rate is regulated by RBA. RBA changes in interest rate to maintain the equality in demand and supply of currency. Therefore, when the interest rate decreased, the money supply increased that cause the value of currency to decrease. Similarly, other factors such as trade of country that is also suffering due to brexit because the market of UK and Europe has been slacken due to brexit that affects the trade of Australia. However, the value of AUD has increased over the period against pound. It is around 1 AUD to 0.61 pound that shows that the value of AUD increased over past few months after brexit (X-rates, 2017).

If the value of British pound against Australian dollar goes down, the Australian exporter of alcoholic beverages to Britain would have more income in terms of British currency. The price of the alcohol exported has been decided in advance so the amount of Australian dollars earned would remain the same. But in exchange of those Australian dollars, more British pounds would be made available to the Australian exporter. In the market the Australian exporter would get more British currency.

But it has to be understood that sliding pound means that British wines become less costly for non Britishers (The guardian, 2017). Many Australians would now be able to import British wines for less Australian currency. This means that British exports of wine would go up. This would result in lesser supply of wine in British market and this opens up more opportunity for the Australian exporter of wine to Britain. Thus sliding pound brings more profits and opportunities to the Australian exporter.

There are several advantages for Australia of the falling value of British pound against Australian dollar. Holidays have become cheaper for Australian tourists to United Kingdom. The Australian industry can now import goods and services from Britain at lower costs. The foreign direct investment into Britain from Australian industrialists has become more attractive. The Australian industrialists can buy more British assets for the same amount of Australian dollars. The industrialists from Australia can buy more buildings, equipment and machinery in Britain for same amount of Australian dollars. The trade between the two countries would see a change as a result of the falling pound. There would be more exports from Australia to Britain as earnings are more for Australian exporters (Australian Trade And Investment Commission, 2017).

Advantages for Australia from Falling Value of British Pound

Services from Britain in consultancy, design and law are in great demand. London is a great financial capital of Europe. The British banks provide services to traders of many countries. Their services would now be used by Australian industry and people at lesser costs.

 The common people of Australia can buy more British property for lesser Australian dollars. This would include both housing and commercial property. There are many Australians with relatives in Britain. They would like to invest in property in Britain (Economicshelp.org, 2017). This fall in British pound would be a boon for them. The British property dealers would also like to make more sales to them. The British housing sector would see an upward swing.

In Australia currency exchange rates are floating. In other words the value of the Australian dollar against other currency is decided by the market forces. The demand and supply of a currency in the Australian foreign exchange market decides its exchange rate in terms of other currency. But there are alternatives available to Reserve Bank of Australia to influence the value of the Australian dollar in the market against the pound (Poundsterlinglive.com, 2017). The central bank can try to maintain the exchange rate of 0.60 pounds.  One of the options  is the open market operation. If the value of the Australian dollar against the pound becomes very low, the central bank would sell more pounds in the market. Then there would be more pounds in the market to satisfy the demand for them. The Australian dollar then would become stronger against the pound.

But such open market operations by the central bank are not frequent. There are many factors on which the exchange rate of the Australian dollar depends in relation to a currency of the country. The economic condition of Australia is one big factor. Its rate of inflation, the interest rates prevailing in the country, current account deficit, terms of trade with a country and political stability all affect the exchange rate of the Australian dollar.

If the interest rates of a currency within the country are high, the value of currency in the country is higher. The central bank influences the interest rates if it finds that the exchange rate of Australian dollar is going down drastically through its monetary policy (Reserve Bank Of Australia, 2017). The rate at which the commercial banks lend money also goes up. The interest rates in the country go up. This means that the country’s currency becomes attractive as it attracts more interest. There is more demand for the currency in the international markets.

But this method has limitations. If the rate of interest at which money is given by the commercial banks goes high, the industry will get loans at higher rates from banks and this would adversely affect the industrial growth in the country. The people would get loans at higher rates of interest and this mean that their spending would go down, decreasing demand for goods. The economic growth would suffer.

There are other factors which are not in the control of central bank which affect the exchange rate of Australian dollar. The terms of trade between the Australian and British companies cannot be influenced to a great extent by the central bank of Australia. Then there is also speculation in the market when there are events like the British exit from the European Union.

The open market operations of the Reserve Bank of Australia cannot be limitless as there are profits and losses made on such transactions by the central bank.

References:

Australian Trade And Investment Commission (2017) UK continues as Australia’s top export market in Europe. Available at:

https://www.austrade.gov.au/local-sites/united-kingdom/news/uk-continues-as-australia-s-top-export-market-in-europe (Accessed: 28 March 2017).

Davis, A. and Martlock, C. (2016) Aussie dollar in turmoil as panicking traders send sterling to a 31-year-old low while $70b is wiped from Australian share market amid Brexit ‘leave’ vote [Online]. Available at:

https://www.dailymail.co.uk/news/article-3657446/Turmoil-Aussie-dollar-panicking-traders-ditch-pound-shock-gains-Brexit-leave-camp-horrifying-markets.html (Accessed: 28 March 2017).

Economicshelp.org (2017) Winners and losers from a weak pound. Available at:

https://www.economicshelp.org/blog/1882/economics/winners-and-losers-from-weak-pound/ (Accessed: 28 March 2017).

FRB (2017) ‘Hard Brexit’ fears hit pound May speech [Online]. Available at:

https://www.reuters.com/article/uk-britain-eu-idUSKBN1501A6 (Accessed: 28 March 2017).

Frieden, J. A. (2014) Currency politics: The political economy of exchange rate policy. USA: Princeton University Press.

Gopinath, G., Helpman, E., & Rogoff, K. (Eds.). (2014) Handbook of international economics (Vol. 4). UK: Elsevier.

Poundsterlinglive.com (2017) Australian dollar to keep pressure on the pound as RBA is tipped to avoid further rate cuts in 2016. Available at:

https://www.poundsterlinglive.com/aud/5292-credit-suisse-think-it-highly-unlikely-that-the-reserve-bank-of-australia-will-intervene-to-devalue-the-aussie-again-this-year (Accessed: 28 March 2017).

RBA, (2017) Exchange rate [Online]. Available at:

https://www.rba.gov.au/statistics/frequency/exchange-rates.html (Accessed: 28 March 2017).

Reserve Bank of Australia (2017) Monetary policy. Available at: https://www.rba.gov.au/monetary-policy/ (Accessed: 28 March 2017).

The guardian (2017) Why is the pound falling and what are the implications for Britain? Available at:

https://www.theguardian.com/politics/2016/feb/22/why-is-the-pound-falling-britain-sterling-dollar-uk-credit-vote-eu (Accessed: 28 March 2017).

The guardian, (2017) ‘Hard Brexit’ fears hit pound and Asian stocks ahead of Theresa May’s speech [Online]. Available at: https://www.theguardian.com/politics/2017/jan/17/hard-brexit-fears-hit-pound-and-stocks-ahead-of-theresa-mays-speech (Accessed: 28 March 2017).

The guardian, (2017) Pound continues to fall against dollar amid ‘hard Brexit’ fears [Online]. Available at:

https://www.theguardian.com/business/2016/oct/10/pound-continues-to-fall-against-dollar-and-euro-amid-hard-brexit-fears (Accessed: 28 March 2017).

Woodford, (2017) The economic impact of Brexit [Online]. Available at: https://woodfordfunds.com/economic-impact-brexit-report/ (Accessed: 28 March 2017).

X-rates, (2017) Exchange rate of AUD to Pound [Online]. Available at: https://www.x-rates.com/average/?

from=AUD&to=GBP&amount=1&year=2016 (Accessed: 28 March 2017).

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order