On June 23rd over 50% of British people voted to leave the European Union, a move that has shaken the worldwide financial landscape. Despite our location on the other side of the world, the impact of this move is far reaching. Whilst it’s not known exactly what effect Brexit is likely to have on the New Zealand economy, there are already signs of changes. Here’s a wrap up what changes you could expect.
KiwiSaver
If you’ve been following the performance of your KiwiSaver fund, you may have noticed your balance dipping. With the announcement of Brexit, around US$2 trillion was erased from the value of global share markets, with roughly $2.8 billion wiped off New Zealand’s stock exchange alone.
As most KiwiSaver funds have at least a portion of their investment in share markets, any volatility that hits those markets has a direct impact. If the share prices drop, the value of a KiwiSaver account invested in those shares drops too. The good news is your KiwiSaver should bounce back as share markets move in cycles, generally trending upwards over time.
Riding out the turbulence rather than switching to a lower risk fund will pay off in the long run. When the share markets are down, the money you contribute to KiwiSaver buys more shares. Once the market improves, your shares become worth more and you reap the benefits.
Interest rates
As the global economy and financial markets absorb the impact of Brexit, many economists believe the Reserve Bank is now even more likely to cut interest rates in August, with some suggesting a rate below 2% is entirely possible. However, with this much uncertainty in the market, banks’ funding costs are likely to increase which means mortgage rates would not be cut even if the Official Cash Rate is lowered. The Reserve Bank will also be keen to avoid fuelling an already heated property market with any rate cuts.
Working abroad, holidays and exports
Unfortunately, the Brexit vote is bad news for New Zealanders with British passports who may have enjoyed being able to live and work in the EU, as that looks likely to change. As far as exports are concerned, while Britain isn’t the crucial export market it once was, it still received around $3.1 billion in New Zealand exports last year. It’s highly likely trade arrangements will be affected if new trade deals need to be negotiated between the EU and Britain.
Brexit could also impact on the New Zealand tourism industry; with Britain being the fourth biggest source of tourists, a steep drop in the pound’s value could make travelling to New Zealand too expensive for many Britons. On the positive side, Kiwis heading to the UK on holiday will have far more spending power with the pound dropping against the dollar.
Good changes
It remains to be seen what the full impact of Brexit will be, both on the world markets and in particular here in New Zealand. As financial markets begin a process of recovery, it’s understandable there will be some uncertainty. If you are concerned about the state of your own finances, talk to one of our advisers about a financial health check and let’s ensure you’re in the best possible financial position.
