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Some Early Signs of ‘Brexit’ Upheaval



– The New York Times

Royal Dutch Shell got clearance from antitrust authorities in China for the takeover of BG Group Plc, removing the final regulatory hurdle for its largest-ever deal. Credit Simon Dawson/Bloomberg

FRANKFURT — Only hours after Britain decided to leave the European Union, Emmanuel Lumineau cast his own “remain” vote — with his feet. Mr. Lumineau said he would move to Paris from London and take about 10 employees at his financial start-up with him.

The looming question on Friday was how many other executives might reach the same conclusion, undermining Britain’s status as the No. 1 destination in Europe for foreign investment.

Mr. Lumineau’s reasoning was simple. His customers operate under European rules and so must he. “We need to be inside,” said Mr. Lumineau, the French chief executive of BrickVest, a company that allows customers to invest small sums in real estate online.

The long-term business consequences of Brexit will take years to fully emerge, largely because no one knows what kind of new trade barriers and regulations will emerge from negotiations with the European Union. But already there were worrisome signs that the “remain” camp’s warnings of economic tumult could come true.

Jamie Dimon, chief executive of JPMorgan Chase, warned his staff in a memo on Friday that in months to come “we may need to make changes to our European legal entity structure and the location of some roles.” Mr. Dimon had said before the vote that up to a quarter of JPMorgan’s 16,000 employees in Britain might need to relocate.

Shares of British property companies plunged Friday on fears that the Brexit vote will cause a recession and deflate London’s real estate boom.

Jürgen Maier, the top executive in Britain of Siemens, the German electronics and engineering giant, said it might need to rethink its investment plans. He predicted others would do the same, at least until they can judge the impact of Brexit.


“All companies will be holding fire to see what happens,” said Mr. Maier, Siemens’s chief executive for Britain.

For decades, big multinational companies have used Britain as their business-friendly, English-speaking beachhead to Europe. As a member of the European Union, Britain offered frictionless access to the mainland, while the legacy of Margaret Thatcher meant there was far less regulation than in France or Germany.

Now that the English Channel suddenly seems a lot wider, businesses are waiting nervously to see what kind of new Europe will take shape. Negotiations on a post-Brexit trade relationship are likely to be messy and take years. And in the meantime, Europe could be in for serious political instability as right-wing parties in France, Finland and other countries try to ride Britain’s coattails out of the union.

It is not all bad for business. The plunging pound will help the tourism industry by making Britain cheaper to visit. BMW Mini automobiles and other products manufactured in Britain will be less expensive for people paying in euros and other foreign currencies. That could be good for exports.

Britain could also be free to follow its free market instincts without interference from Brussels. If the “leave” forces are correct, that would make the country a magnet for companies seeking to escape the regulatory corset of mainland Europe.

But any advantages are likely to be outweighed by the enormous uncertainties ahead. With no road map, executive decision-making could be paralyzed and investment could come to a standstill.

Britain’s financial services industry, which employs 1.2 million people, is especially vulnerable. New stock listings in London are likely to all but cease while companies take stock of the damage.

Foreign banks may face the costs of moving thousands of employees out of London to the Continent so they can satisfy regulations governing trading and investment advice on behalf of European clients. London had provided a convenient hub to serve Europe.

James P. Gorman, the Morgan Stanley chief executive, and Colm Kelleher, the president, said Friday that they had no plans to relocate staff from London. But in a memo to employees — many of whom worked through the night to handle a huge trading volume — they said they might “consider adjustments to our operating model.”

A cask of The Glenlivet single malt whisky, produced by Pernod Ricard SA. Credit Simon Dawson/Bloomberg

Even Deutsche Bank, the symbol of German banking nominally based in Frankfurt, uses London as a base for investment banking and trading. It has often made most of its profit there.

“I’m afraid that this is not such a good day for Europe,” said John Cryan, the Deutsche Bank chief, who happens to be British. “At this stage, we cannot fully foresee the consequences, but there’s no doubt that they will be negative on all sides.”

Perhaps no company embodies the European project more than Airbus, a politically driven consortium that allowed Europe to remain a player in the aircraft industry after smaller national manufacturers could no longer compete. Airbus produces wings in Broughton and employs 15,000 people in Britain plus tens of thousands more at suppliers.

Outside the union, Britain may no longer have as strong a claim on those jobs. “This is a lose-lose result for both Britain and Europe,” said Thomas Enders, the Airbus chief executive. “We will review our U.K. investment strategy, like everybody else will.”

Other sectors as different as petrochemicals and Scottish whisky could be damaged by increases in customs duties, diverging legal requirements and slumping growth. Energy companies like BP or Royal Dutch Shell are worried about having to deal with an unwieldy snarl of differing regulations once the European Union umbrella is gone. “Uncertainty is never helpful for a business such as ours,” BP said in a statement Friday.

United States technology companies like Google and Facebook have sizable operations in Britain, though their headquarters are technically in low-tax countries like Ireland and the Netherlands. Google employs roughly 1,000 engineers across Britain, working on global products like its search engine and Android mobile operating system. Technology companies could be under pressure to move sales and marketing jobs from Britain, so these employees can still have access to Europe’s common marketplace.

The ties are especially close between Britain and Germany, where the dismay was particularly pronounced. Britain imports more products from Germany than anywhere else. Britain is Germany’s third-largest customer for exports, after the United States and France.

German brands like BMW, Mercedes and Volkswagen account for half the cars sold in Britain, according to the German Association of the Automobile Industry. Sales could suffer if Britain raises tariffs on imported vehicles. Shares of BMW, Daimler and Volkswagen plunged Friday.

German companies have helped keep alive manufacturing in Britain. Mini and Rolls-Royce are considered iconic British car brands, but both are owned by BMW. Bentley belongs to Volkswagen.

Probably the most important company in the renaissance of British car manufacturing has been Nissan, which has pumped close to 4 billion pounds since the mid-1980s into a world-class factory in Sunderland in northeast England. Last year the company produced about 475,000 vehicles, about a third of Britain’s total, exporting about 55 percent of them to the European Union.

Yet despite the European Union’s importance to local jobs, voters in Sunderland voted overwhelmingly to leave. The Brexit camp won 61 percent of the vote compared with 39 percent for remain. Stuart Boyd, a Nissan spokesman, said on Friday that the company was not ready to comment on how it might respond.

Perhaps workers believed that Nissan sales would increase because of a weaker pound. But any stimulus to British exports from a devalued currency is likely to be offset by higher prices for imported goods. Britain has a trade deficit, so a weaker pound is on balance negative.

Another huge foreign manufacturer is Siemens, based in Munich, which has 13 factories and 14,000 workers in Britain making products like electric motors, gas turbines and trains. Siemens is not about to pull up stakes. But Mr. Maier, the Siemens chief for Britain, said the Brexit vote could force the company to recalculate some investment decisions.

For example, European Union grants help finance Siemens research and development projects in Britain in areas like self-driving cars. That financial support will disappear once Britain is out.

“The question is more about future investment, future research and development,” Mr. Maier said. “That’s hanging in the balance.”

He embodies the strong ties between Britain and the mainland. Born in Germany, Mr. Maier has lived in Britain since he was 10, studied there, and speaks with a British accent. He said that there was a palpable sense of anxiety Friday morning when he visited a company office in Manchester that is used by engineers and customer service representatives.

“It’s usually a really buzzing office,” Mr. Maier said. “This morning it was definitely quiet. Customers weren’t calling. That’s not a good sign. The country is just taking all of this in.”

Contributing reporting were Chad Bray and Stanley Reed from London, Nathaniel Popper and Michael Corkery from New York, Mark Scott from Rome and David Jolly from Paris

How Brexit impacts the U.S. economy


How Brexit impacts the U.S. economy

The United Kingdom shocked the world when its citizens voted to leave the European Union Thursday.

The so-called Brexit has wide implications for the U.S. economy, which is already facing a slew of headwinds.

The chief of the U.S. central bank and top monetary policy setting official, Janet Yellen, forewarned earlier this week that Brexit “would negatively affect financial conditions and the U.S. economy.”

Trade between the two nations only makes up 0.5% of U.S. economic activity. However, the connections go well beyond direct trade between the two global powers.

The effect on America can come through a number of chain reactions — a Brexit domino effect on the global economy. Here are four ways the wake of Brexit could hurt the U.S. economy.

Related: UK votes to exit EU, Cameron to quit

1. Fears that the EU may be falling apart

One of the key global concerns rattling the markets is that Britain could be just the first of more EU countries to leave the union. On Friday, French right-wing leader Maine Le Pen called for France’s own referendum vote. Concerns have been raised about referendums from Italy and the Netherlands too.

The European Union is one of the world’s largest trading blocs and it’s a major trade partner with China and the United States. If it breaks, it could lead to a lot of global uncertainty and many trade deals would need to be restructured.

Some experts caution that fears of the EU falling apart are overblown. After all, the UK always used the pound as its currency. Other countries like France would have to ditch the euro and reintroduce their old currency. That’s a much more difficult transition than what the UK must navigate now.

Plus the high expectation of a looming recession in the UK may give other countries pause, especially if they see an economic storm that Britain may endure after Brexit.

Still, the fear of the EU’s opaque path ahead is real.

“We also need to acknowledge we are faced with lots of doubts about the direction of Europe … not just in the U.K. but in other countries as well,” German Chancellor Angela Merkel told reporters.


2. Volatile markets slow down the engine of U.S. growth

American consumers make up the majority of U.S. economic activity. If they don’t spend, the economy doesn’t grow. And how much they spend often depends on how they feel good about where the country is heading. Americans don’t buy homes and cars if things look bleak and a stock market downturn can really whittle down confidence.

Brexit is already causing severe volatility in global stock markets. If that volatility continues for weeks and months, it could cause American business owners and consumers to reconsider their spending plans.

“The keys to whether the U.S. economy is affected significantly will be whether equities tumble enough to have a major impact on business and consumer confidence,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics, a research firm.

A cutback by consumers would be particularly bad news at the moment.

U.S. job gains have slowed this spring and economic growth was sluggish in the winter. But a recent pickup in consumer spending has been one of the few bright spots. The added momentum in spending had raised hopes that growth would rise in spring and summer.

Related: British pound gets crushed by Brexit shock

3. Brexit triggers a strong dollar, which hurts U.S. trade

A strong dollar sounds good — and it is for American travelers — but it’s bad for U.S. businesses that sell products overseas.

On Friday morning, the U.S. dollar quickly rallied against the British pound, up 6.3% Friday, its biggest one-day gain since 1967, according to FactSet, a financial data firm.

A strong dollar makes company’s products more expensive — and less attractive — to buyers outside the U.S. That hurts sales for tech giants like Apple (AAPL, Tech30), equipment makers like Deere (DE) and Caterpillar (CAT) and global brands like Coca-Cola (KO) and Nike (NKE).

It’s one of the key reasons why Corporate America has been in an “earnings recession,” with profits declining for three straight quarter on an annual basis.

“The biggest impact economically is the dollar impact,” says Matt Lloyd, chief investment strategist at Advisors Asset Management. “If the dollar surges on [Brexit] for any period of time, then you’re going to see fears of the profits recession lasting longer.”

In short, a stronger dollar typically lowers U.S. exports — a theme we saw last year. The U.S. manufacturing sector, which relies heavily on trade, fell into a 5-month recession triggered by the strong dollar. Manufacturing lost a net 39,000 jobs in the past 12 months.

So if the dollar continues its post-Brexit gains, it would spell bad news for U.S. trade and manufacturing, which is just digging out of its hole from last year.

A stronger dollar could make imported items cheaper for U.S. consumers, which could offset consumer fears about volatile global markets. But at this point, fears of a stronger dollar appear to be outweighing positives of it.

Related: Biggest losers from Brexit: These companies

4. Brexit forces the Fed to rewrite its rate hike playbook

In December, the Federal Reserve projected that it would raise rates four times this year — a strong sign that the U.S. economy has recovered from the Great Recession. Higher interest rates benefit savers, who can make more money on deposits.

But by June, several Fed committee members were only calling for one rate hike in the wake of weak growth and slowing job gains.

If the volatility in markets from Brexit continues, and if U.S. consumers pare back spending, and employers slow down hiring even more, the Fed could be looking at zero rate hikes in 2016. In fact, markets are starting to increase their expectations for a rate cut this year.

It’s not how the Federal Reserve had planned the year to unfold. U.S. central bank officials had started the year with high expectations after raising rates in December for the first time in nearly a decade, also known as “liftoff.”

But instead, the Fed is coming back down to earth. Other central banks around the world have lowered rates into negative territory and the conversation has shifted to whether the Fed should consider that move too.

“For the Federal Reserve, a Brexit vote would make it more difficult to raise interest rates,” says PNC senior international economist Bill Adams.

— Mark Thompson contributed to this story