Massachusetts May Soon Have a Brexit Problem

From the Boston Globe, June 24 2016 – Article by Jon Chesto

The Bay State may soon have a Brexit problem.

From big manufacturers to financial firms with British outposts to everyday investors watching their 401(k) plans, the Massachusetts economy is likely to be hit by the United Kingdom’s decision to leave the European Union.

The United Kingdom is a significant market for Massachusetts exports, with the sales of local products, from cranberries to candles, valued at $1.2 billion. But the Brexit vote is also rattling the rest of Europe, a much bigger market for local manufacturers.

Software, medical device, and electronics companies that sell products to Britain will most likely see the prices of their products increase as the US dollar strengthens against the pound. And demand there could drop if the British economy shrinks, as expected.

The bigger long-term fear: Brexit could trigger breakaway movements within other European countries, threatening the EU itself and creating uncertainty that could drag down the US economy. Given the unprecedented nature of Britain’s move, it’s hard to know how bad things will get.

“What this vote has done is it has created a huge package of uncertainty, both short term and long term,” said Chris Geehern, executive vice president at Associated Industries of Massachusetts. “Fasten your seat belts. It’s going to be an interesting ride.”

Geehern said he expects the value of the dollar to increase, not just in the United Kingdom, but against other currencies, too. That would make products exported by Massachusetts manufacturers more expensive.

 

The value of the British pound

Michael Tamasi was among local business executives struggling to assess the damage Friday. His company, AccuRounds, makes metal components for other manufacturers that sell overseas. Tamasi said AccuRounds immediately began contacting key clients to determine how Brexit would affect their purchasing plans, Tamasi said.

“It’s kind of a tenuous situation,” said Tamasi, AccuRounds’ chief executive.

Robert Nakosteen, an economics professor at the University of Massachusetts Amherst, said he expects the United Kingdom will be stuck with unfavorable tariff agreements with the European Union, creating an economic barrier between the British economy and the continent.

Fortunately for Massachusetts, exports are only a small part of the overall economy, Nakosteen said, with sales to the United Kingdom probably less than 1 percent of the state’s gross product.

“I don’t think the effects are going to be major because the UK is not all that important to our economy [on its own],” he said.

But if Brexit sets off a series of falling dominos that eventually hit the US economy, then Massachusetts companies will probably be hurt.

The firms in Boston’s large investment community that do business in London may have to reassess their operations in Europe’s financial capital now that it will no longer be within the larger EU economic community.

State Street Corp., for example, had more than 2,000 employees in London as of the end of the year, and stores its large gold reserves there.

Among large publicly traded companies in Massachusetts, State Street had the biggest sell-off Friday, falling almost 9 percent to close at $54.99. A State Street spokeswoman declined to comment on the firm’s London operations.

For State Street and other financial companies, Babson College lecturer Peter Cohan said a banking exodus from London, while not imminent, is a possibility down the line.

“They’re going to have to find a new place to locate in Europe, probably,” Cohan said. “They’re going to have to do some layoffs and move people, and the whole thing is going to cost a lot more than people were expecting.”

But to where? “That’s a real problem in terms of financial services because there’s no other natural center for finance in Europe,” said Megan Greene, the chief economist at insurer John Hancock in Boston.

Greene said she stayed up all night to track the vote. As the results came in, her inbox filled up with bitter e-mails from people in industries, many of the messages laced with profanities.

London has also been the natural base for many US companies to launch European expansions, and they, too, may have to find another home on the continent. For life sciences companies, the regulatory approval process in Europe is considered to be quicker than in the United States, said Tom Sommer, president of the Massachusetts Medical Device Industry Council.

“The fact that you could establish a foothold in the European market in the UK now seems to have lost a lot of its luster,” Sommer said.

Even stalwarts of the economy such as local universities could be hit, said Boston higher education consultant Brian Mitchell. A stronger dollar means higher tuition costs for families from overseas. Moreover, a global downturn would probably hurt college endowments and discourage donors from making big gifts.

There is one sector of the state’s economy that could benefit: real estate. Mortgage rates often drop when investors gobble up bonds because of their perceived safety. “It’s really prohousing,” Nathan Weiss, a hedge-fund adviser based in East Greenwich, R.I., said of Brexit. “That’s probably one of the biggest unforeseen impacts.”

The effects could be seen in other unexpected ways. Richard Stavis, chief executive of Boston seafood distributor Stavis Seafoods, said shrimp companies are on edge right now. Canadian shrimp is popular in Britain, and the UK buyers pay a premium to get it. Stavis said he thinks prices will drop as a result of the Brexit vote.

To some extent, that’s good for Stavis because it may allow him to establish a bigger market for that shrimp in the United States.

“Lower prices is better news for us,” Stavis said. “It means it would get on more menus, and we would sell more product.”

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