cause more volatility because banks and other financial institutions are less keen to circulate risky assets. What does this mean? Well if you look at the latest Bank of Canada assessment of the financial system, a lack of “liquidity” was one of its major concerns. Given that banking is contingent on lenders having access to cheap collateral such as bonds. If bankers’ are scared, they will demand higher interest rates. Borrowing costs rise across the board. If they rise too much, or if bankers’ get too scared, the financial system will seize like it did during the financial crisis of 2008. The last thing Canada needs right now is higher interest rates. The Bank of Canada has been trying to persuade companies to invest with record low interest, with no success as business confidence is very low and companies are keeping a close eye on capital expenses. The other reason Canada should worry about Brexit is what it could mean to its largest trading partner. Historically when investors get nervous, they favor the United States dollar. After speaking with Canadian Finance Minister, Bill Morneau and Bank of Canada Governor, Stephen Poloz, who have been in contact with their G7 counterparts, Prime Minister, Justin Trudeau said, “They are monitor- ing world markets knowing that Canada’s financial system remains strong and stable.” This was after growing concern that the loonie, the Canadian Dollar, lost more than a cent against the U.S. dollar in reaction to Britons’ vote to exit the European Union. Trudeau also added that
Canada shares deep historical ties and common values with the United Kingdom and the European Union, and will continue to work with both. A strong United States currency for an extended period would hurt American exporters and reduce sales profits on the United States companies doing business overseas. Lost profits would likely curb United States business invest- ment, which Bank of Canada Governor, Stephen Poloz has said repeatedly is key for boosting Canadian exports. This volatility in Europe could spread into Asia. A spike in the yen could weaken Japan’s export-dependent economy which is currently in a fragile state. If we look to China, which is the world’s second largest economy, things could get even worse. A slowing of European economy will affect the demand for goods from China and weaker demand for exports will raise new questions about the Chinese government’s ability to meet its growth target of about 6.5 per cent. The other economies of Asia are highly geared to China, so weakness there means weakness in South Korea, Aus- tralia and other countries in the liveliest corner of the world economy in recent years. To make a long story short, Brexit might not have been about the United Kingdom voting to free from the EU and a little less prosperous in the short term, as it may have been a vote for weakened economic recovery in the rest of the world.
71
JULY 2016 • SPOTLIGHT ON BUSINESS
Made with FlippingBook Online newsletter