The Brexit vote is a major political event with important financial consequences, particularly in the United Kingdom. It reverses the post-World War II trend of countries working more closely together, politically and economically.
It also highlights the growing gap between the young and the old; the highly educated and less educated; and major cities and rural areas. These trends could have major political consequences in the years ahead.
A survey by YouGov, a major online marketing organisation, showed only 29 per cent of the 18-to-24 age group voted to leave Europe compared with 64 per cent of the 65-plus group.
The survey also showed only 32 per cent of individuals with university degrees voted to leave whereas 70 per cent of those with limited education voted to exit.
Only three of England’s 12 regions voted to stay; Scotland with 62.0 per cent, London 59.9 per cent and Northern Ireland 55.8 per cent.
London is the UK’s wealthiest area whereas the northeast, northwest, Yorkshire and the Humber — which are much poorer regions — all had strong leave majorities.
It is difficult to know why most voters chose to leave but a number of post-referendum polls showed that immigration was an important factor. A survey by the Independent revealed that 52 per cent of respondents believed that immigration would be better controlled outside the EU whereas only 3 per cent thought it would be worse.
Nigel Farage, leader of the far-right UK Independence Party (Ukip), used the emotional argument that large-scale migration of low-wage workers from Europe had depressed the wages of British workers. He also claimed that migrants would occupy hospital beds and use other government services at the expense of UK-born citizens, and large-scale immigration put English women at greater risk of sexual assault.
Ukip supporters, who are totally opposed to immigration, voted 95 per cent to exit the EU while Green Party supporters, the strongest advocates of EU membership, voted 80 per cent to stay.
The Guardian, CNN and most other polls show that migration was the main reason the UK voted to leave the EU.
The migrant issue highlights major differences between the UK and New Zealand.
The latest statistics show 13 per cent of the total UK population was born offshore compared with 23.6 per cent of NZ residents. Based on these raw figures, Britain should have less of an immigration problem than New Zealand.
The largest sources of UK immigration are India and Poland, each representing 9.6 per cent of the foreign-born population, Pakistan (6.3 per cent), Republic of Ireland (4.6 per cent) and Germany (3.6 per cent).
The exit decision will have a limited effect on UK immigration as seven of the top 10 sources of UK immigration are non-EU countries. In addition, more than a third of the foreign-born individuals living in Britain are British nationals and have the right to move there.
One of the referendum’s ironies was that London voted strongly in support of staying even though 37 per cent of the country’s migrants live in the huge metropolis whereas the northeast, which has only 1.6 per cent of the total migrants, had a clear majority in favour of an exit.
The accompanying table shows the UK’s net migration (the difference between immigration and emigration) has increased in recent years. This is consistent with worldwide trends as UN statistics show there are now 244 million global migrants compared with 222 million five years ago and 191 million a decade ago.
The combination of increased migration and an ageing population represents a major political threat to financial markets, as demonstrated by the UK referendum and the Donald Trump phenomenon in the United States. Older people tend to vote for isolationism, particularly if this means less immigration, but this will also lead to trade protectionism and a reduction in international trade.
The exit decision will have a major impact on the UK economy, particularly as far as business investment is concerned.
Overseas companies planning to invest in the UK in order to access EU markets will defer or postpone their investment. Companies with UK operations may downsize or close these activities and move to continental Europe.
The services sector, particularly financial services, will have reduced opportunities when Britain leaves the EU. The interesting point here is that the northeast voted strongly to leave but Newcastle, the region’s largest city, voted to remain.
Newcastle has been transformed from an industrial to a services-based economy and the city’s voters understand that a decision to exit the EU will have a negative impact on its expanding services sector. The northeast has the UK’s highest unemployment rate yet its electorate voted to leave the EU, which will make it more difficult for the region to establish a strong service sector and replace its traditional coal, shipbuilding and iron and steel-based economy.
Although Brexit was a major issue as far as financial markets were concerned, it hasn’t had a negative impact on the London sharemarket during the first six months of the year as demonstrated by the following figures;
- London’s FTSE 100 Index appreciated 4.2 per cent in the six months to June 30.
- Germany’s DAX 30 Index declined 9.9 per cent.
- France’s CAC 40 Index fell 8.6 per cent.
- Milan’s MIB 30 Index was off 24.4 per cent.
The US’s Dow Jones Industrial Index appreciated 2.9 per cent during the first six months of the year, the ASX was down 1.2 per cent while the NZX, excluding dividends, appreciated by 6.8 per cent.
Financial markets have experienced extreme volatility because of a number of short-term events — including Brexit, the Greek financial crisis and concerns about the European banking sector — but the big long-term time bomb is ageing Western societies.
This will put enormous pressure on government expenditure, particularly healthcare services. Western countries will need younger workers to replace older people as the latter exit the work force and immigration is an important supplier of this replacement work force.
As far as this is concerned, the UK attracts immigrants for two main reasons: to work and to study.
Most of Britain’s immigrants from the EU come to work, whereas immigrants from non-EU countries focus on study. The EU exit decision means that there will be fewer workers arriving from the EU and the UK will have to look to Commonwealth countries, including New Zealand, for young workers.
New Zealand, by contrast, is in a much better position than the UK as far as a replacement workforce is concerned. We have had a much higher net permanent migration rate than the UK in recent years and 64 per cent of the country’s total permanent arrivals in 2015 were in the important 15-to-34 age group. This is exactly the immigration profile required by an ageing society.
The decision by the UK’s older age group to vote for an EU exit could come back and bite them.
Who will pay the taxes to support the UK government’s healthcare services and where will Britain find the workers to staff its burgeoning retirement village sector?
Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.