What does the UK’s vote to leave the European Union mean for Arizona businesses? Nobody really knows.
Pundits around the world agree on one thing about the British vote to pull out of the European Union: it’s all speculation on what it means.
Since no country has ever left the EU, even the process is up in the air, but it’s the whole up in the air situation that can impact Arizona, said Dr. Allen Morrison, CEO and director general of Arizona State University Thunderbird School of Global Management.
“In Arizona, the dollar volume of trade with the European Union is statistically insignificant as part of the state’s (gross domestic product),” said Morrison. “However, the uncertainty of the impact of an economy like the United Kingdom pulling out of the EU has indirect impacts that will be felt in Arizona.”
Morrison said the domino effect is the big issue. He is concerned that fringe groups in other countries could force actions leading to a breakup of the economic region based on the European continent, but spreading into Eurasia and the Mediterranean nations.
“Uncertainty is the enemy of business,” he said. “It will be far better to do this quickly and drag it out.”
Morrison is not alone in those assessments. David Schiegoleit, managing director of investments with Orange County, California-based U.S. Bank Wealth Management, in said contagion is the biggest fear.
“It’s the extremes on the left and right depending on the country,” Schiegoleit said. “They are pushing for exit referenda seriously in France, and potentially Italy and Spain. Austria and Poland are considered Euroskeptics.”
Scheigoleit said if the EU starts fracturing, it would have devastating economic impacts across Europe that would be felt in the U.S.
Morrison, who lived and taught in Europe for two decades, is more direct.
“If the EU fails or undergoes a major transformation, if will lead to a fairly serious recession,” he said. “That could have dramatic impacts indirectly on Arizona businesses.”
While there are 8,000 Arizona businesses regularly exporting goods and services, 90 percent are small businesses with sales under $10 million. A downturn in the $23 billion Arizona export economy could hurt already anemic economic growth.
Another facet of Arizona’s economy that could be hit is tourism. The United Kingdom is the fourth largest source of Arizona’s foreign tourists. The plummeting pound against the U.S. dollar has possible repercussions, but the Arizona Office of Tourism isn’t sure what will happen.
“At this time, it is too early to tell what impact this will have on Arizona’s U.K. visitation,” said Debbie Johnson, AOT director in an emailed statement to Phoenix Business Journal. “We host more than 100,000 visitors from the U.K. annually, so this is something we will be monitoring closely.”
The already anemic U.S. growth rate would become more anemic if exports to the EU slowed, said Schiegoleit.
“Markets hate uncertainty, and this is certainly a headwind for the economy until it’s known what’s going to happen,” he said.
The uncertainty ripples across the currency and equities markets, and into the portfolios of individuals. People are concerned about portfolio value, and financial planner Bud Heintz of Heintz Wealth Management cautions about overreaction.
“Things are really up in the air,” he said. “There’s no one in charge at the moment. Everyone is waiting for someone else to make the first move.”
That lack of leadership is part of what’s driving some investors to worry and want to take risk off the table.
“When there is a crisis, people want to reduce their exposure,” Heintz said. “I tell my clients this is not a Lehman Brothers rerun. There is not a collapse; it’s a rearrangement.”
Morrison said that the impact on the economy is how it’s all managed.
“This could be an opportunity for economic growth,” he said. “As long as it is handled expeditiously.”