How Does Brexit Affect Britain's Economic Future?

In news that shocked the market, the U.K. voted to leave the EU by a slim margin of 2%. The result of the historic vote has mixed reactions globally, and has many deeper ramifications that must be considered.

Understandably, the geopolitical atmosphere remains in disarray with Prime Minister David Cameron announcing his resignation, remaining in office through October. There is a lot to be said, but for now let’s take a look at the potential economic implications of Britain’s choice. Important to note however, is the fact that at this point all speculation is purely that: speculation.

Job Loss is Very Painful for Britain

On Friday, every major bank in Britain dropped dramatically. The Royal Bank of Scotland (TO:RBS) fell 23%, Lloyds Banking (LON:LLOY) Group (NYSE:LYG) down 22.4%, HSBC Holdings (NYSE:C) down 8.4%, and Barclays PLC (NYSE:C) down 20.5%

U.S. banks were hit hard as well, with J.P. Morgan Chase (NYSE:JPM) is falling 6.7%, Goldman Sachs (NYSE:GS) down 7.3% and Citigroup (NYSE:C) down 9.1% since opening bell.

London has long been known as the financial heart of Europe and the largest financial center in the world; however, Brexit has created discussion of job relocation for every major financial firm in the city. As Fortune highlights, foreign financial firms were strong proponents of the “Remain” campaign, with GS spending upwards of $500,000 in funding for the movement.

Independent, the U.K.-based newspaper, reports that sources have told BBC that Morgan Stanley (NYSE:MS) plans to move 2,000 jobs to Dublin and Frankfurt, a move that the firm denies. JP Morgan stated it was likely to move at least 1,000 employees out of London. All in all, the city could lose as many as 40,000 financial jobs as a direct result of the Brexit vote.

The main issue is that other than serving as the financial heart of Europe, Britain does not have any other notable output. As The Guardian highlighted some time back, manufacturing and construction combined account for about 20% of Britain’s economy, whereas services account for an astounding 79%. The financial sector accounts for 10% of UK’s GDP, meaning that the expected job loss has a high possibility of causing a significant amount of damage.

Membership in the EU came with notable benefits, such as eliminating tariff barriers and customs procedures, as well as providing the U.K. with access to a $16.6 trillion a year market of nearly half a billion people, as per CBI.

So Uh, What About Trade?

A crucial point of notice is the fact that Britain, the nation with the 9^th most exports and 5^th most imports in the world, participates in most of its trade with members of the EU. Stats from the Observatory of Economic Complexity at MIT show that current figures stand at roughly $472B in exports and $663B in imports, numbers that will be hampered dramatically by Brexit.

The nation with the highest volume of exports to Britain is Germany, accounting for nearly $100B of products. According to the World Bank, Germany normally institutes an average tariff rate of 1.5% across all products, something that Britain didn’t have to worry about paying before. Now that they are no longer in the EU, this will become another expense, not only with Germany but for every other EU member it trades with.

Because Britain does not produce much on its own, imports are an integral way to meet needs. Added cost along with decreased output due to damage in the financial sector puts Britain in a less than savory position moving forward. Effects of Brexit were visible as soon as Friday morning, when France surpassed Britain as the fifth largest economy in the world.

Changes to Quality of Life

With Brexit comes an inevitable increase in unemployment as well as a currency that has reached 32-year lows. The people of Britain will now face uncertainty in many facets of day to day life; it could be at least two years before the technicalities of Brexit are fully settled.

Scotland has begun conversation over another referendum. With 62% of the country voting to stay in the EU, there is plenty of dissatisfaction over the result of the vote. Scotland’s theoretical departure would certainly hurt the U.K., considering 9.1% of overall U.K. tax revenue comes from them.

The majority of small towns and industrial centers in the U.K. voted to leave, but in doing so they shot themselves in the foot. Increased trade difficulty and loss of jobs are not putting Britain on track to experience any economic alleviation in the near future.

Bottom Line

No doubt many different emotions ran through the heads of British citizens as they voted on the controversial Brexit referendum. The result, shocking as it may be, are results that the nation now have to live with. Every action has consequences, and this case is no different in that regard.

These factors show that the economic implications of Britain’s departure from the EU run deep, with the resulting damage just beginning to show. Britain certainly has a long way forward, and much work left to do. Although the future ahead could be less rocky than expected, current signs certainly indicate turbulence at this point in time.