On June 23, 2016, voters in the United Kingdom voted 52 to 48 percent to leave the European Union, the 28-member organization of which it had been a part since the early 1970s. Immediately, the value of the British pound plummeted. Stock markets tumbled worldwide. Financial experts began to warn of an impending European recession.
Here, across the pond, owners of small-to-medium-sized enterprises (SMEs) looked at the “Brexit” results with a mixture of concern, confusion and mounting dread. Mostly because we’ve only recently found ourselves out of the massive hole caused by the Great Recession of 2007-09. Could this political shift trigger another, perhaps even more devastating downturn?
Based on what we know so far, the answer is: probably not. While the British economy is likely to experience painful contractions over the next few years, U.S. companies will, with only a few exceptions, continue to operate as if the British referendum had never been held. I base my optimism on a number of factors, including the American small business community’s economic relationship to the U.K., the increasingly robust state of the U.S. economy in general, and the growing resilience of the SME segment in particular.
Brexit and the British Economy
For the European Union, Brexit’s “Leave” vote was a shock because of what leaving the E.U. may mean for the British economy and Europe as a whole.
The United Kingdom represents the E.U.’s largest economy, ranking between the 5th and 10th largest in the world, depending on how one measures such things. For the past three years, it had the fastest-growing economy among all G7 nations, whose membership includes Canada, France, Germany, Italy, Japan and the United States. Its financial district, the City of London, is not only the largest in Europe, it’s the largest in the world (yes, even larger than Wall Street.) London’s financial industry employees some 750,000 people and is a major source of funding for companies across the Continent.
Driven principally by nationalistic sentiment and concern over perceived unchecked immigration (according to exit polls), the “Leave” vote triggered heightened uncertainty throughout London, as well as markets from New York to Singapore. The global economy has become increasingly interconnected and interdependent over the past few decades, and the innumerable questions raised by the U.K.’s disconnection from its European partners sowed confusion and fear.
This fear and confusion was manifested in many ways:
- The British pound fell to a new 30-year-low against the U.S. dollar. Many experts predict that the Pound Sterling could reach a historic one-to-one parity with the dollar by the end of this year.
- Market values plunged worldwide, causing hundreds of billions of dollars in assets to vanish literally overnight. (Fortunately, most markets have since recovered.)
- The U.K. relaxed many capital rules to support liquidity – an indication of the Bank of England’s serious concern about Brexit’s impact on U.K. banks.
- Trading in three sovereign property funds was suspended on July 5th with several more in the following days.
Before Brexit, economic forecasters predicted that the British economy would grow some eight percent between now and 2020. Now, most are predicting a contraction of up to six percent. That’s a 14 point swing. And because capital is both global and mobile, it would be unwise to ignore the situation.
SMEs and the U.S. Economy
Here on the west side of the Atlantic, the situation is quite different, especially for small-to-medium-sized enterprises. For one, Europe is not a major customer for most American small businesses. While it’s true that 95 percent of the world’s consumers live outside the U.S., only about 3.9 percent of U.S. small businesses actually export to the global market. And an even smaller percentage sell to Europe. The vast majority of SME business is done within the borders of the continental United States, hence any direct impact from Brexit is negligible.
Then, there is the state of the American SMEs themselves. According to Experian’s Main Street Report for Q1 2016, America’s SME community is in better shape than it has been in for years:
- Small business credit conditions continue to improve.
- Small businesses credit scores are good and improving.
- Capital is readily available and is appropriately priced.
- Unemployment is low. (We are approaching statistically full employment.)
- Delinquencies and bankruptcies have declined in most industries and regions.
- Recent increases in credit limits suggest that lenders are optimistic about small businesses.
So far, Brexit has not had a major impact on the availability or cost of capital here in the United States. Now that the initial panic sparked by the surprise “Leave” vote has subsided, the likelihood of a major worldwide recession grow smaller by the day. This leaves American SMEs well-positioned to continue serving their principally domestic markets, with the credit necessary to fuel further expansion and growth, regardless of what’s happening in England, Scotland, Ulster and Wales.
For the people of the E.U. and U.K., Brexit may very well represent a major turning point in the political and economic history of Europe. But for most American small businesses, the next few years are likely to mean business as usual — or in the words of the famous WWII-era British motivational poster, American businesses can “Keep Calm and Carry On.”
