Five areas in UK economy that will face the impact of Brexit

While the people in the UK have voted to leave the European Union (EU), the impact of this news has caught the whole world by surprise. While markets around the world have plummeted, investors scrambled to save themselves from impact of Brexit.

Though people around the world are still trying to come to terms with this decision, there are several implications UK will face as a result of Brexit. This aftershocks will be felt from the political environment which could lead to Prime Minister David Cameron resigning, to UK's trade prospects, FDI inflows and financial sector, according to an HDFC Bank report.

Here are 5 areas of impact for the UK economy:

1. Political uncertainty: The immediate backlash of a vote to leave could force the current PM David Cameron to quitting as it is unlikely that he will be able to stay in office given that the UK public would have voted against his re-negotiated deal with the EU.

There is also likely to be a cabinet reshuffle with a new PM being put in place (probably Boris Johnson) that will mean that there is no stable UK political configuration in place immediately after the vote to begin negotiations with the EU Council.

There is also likely to be uncertainty about the future of Scotland, Wales and Northern Ireland. A complicating factor will be if the UK votes to leave but either Scotland, Wales or Northern Ireland votes to stay.

This could mean that each region could hold independent referendums to decide whether they want to stay part of the UK.

2. UK trade prospects could suffer: Given that the EU is the main trading partner of the UK economy, the immediate effect will be a hit to trade. Around 47% of UK exports go to the EU.

However, the UK economy has a trade deficit with the EU—that means that the UK economy imports more than it exports. Hence, new trade arrangements in which tariffs could be revised will likely result in some degree of widening in the current account deficit.

3. FDI flows could subside: The bigger hit will come from a substantial reduction in FDI flows. The UK has emerged as an important destination because of the access that it provides to the markets of the EU.

Brexit could divert FDI flows from the UK into other regions within the EU and force current FDI investments to be divested.

The overall stock of FDI in the UK economy is estimated to be around 50%-60% of GDP.

On the other hand, the UK economy has substantial FDI holdings of around EUR 500 billion in the EU that could get unwound or probably return back into the UK economy.

4. A loss to London as a financial centre: Financial services providers that are based in one EU country benefit from ‘passporting rights’ that allow them to sell into other regions of the EU without having a branch placed over there.

Without a single market regulation, the UK economy may not enjoy such a privilege anymore. This could undermine London as a financial centre as firms may no-longer get access to the EU.

Given the important contribution that financial services plays in growth, a loss in access to the EU financial sector could have serious adverse consequences for the economy.

The financial and insurance sector is estimated to account for 8.2% of UK GDP and around 3.4% of the jobs in the economy.

5. UK will save on contributing to EU budget: The only area that could benefit is the fiscal budget as the UK government will not have to commit to Euro-zone bail-out money, joint-EU budgets and other joint-spending programs. However, we suspect that the loss in revenues on the back of lower growth could partially offset the benefit of reduced fiscal contribution to the EU.