Brace yourselves, Brexit is coming.
If you haven’t already heard, the United Kingdom (UK) will officially leave the European Union (EU) on the 29th of March 2019… well, at least they are supposed to if all things go to plan.
No idea what I am talking about? It’s probably worth catching up on Brexit before you keep reading.
Despite this all taking place on the other side of the world, we will no doubt see the flow on effects of Brexit ripple across to New Zealand, particularly in regards to trade, foreign currency, inbound tourism and international travel.Of course, we can’t predict exactly what is going to happen before or after Brexit. We can, however, provide some information about potential flow on effects so that you, the Kiwi traveller, can make an informed decision about your next destination with the knowledge of how Brexit might affect your travel money.
It is important to keep in mind that prior to 29 March 2019, there are a few milestones the UK will need to hit to ensure their transition out of the EU is a smooth one.
11 December: The House of Commons vote on Brexit agreement
21 January: The UK must have agreed on a withdrawal agreement by now
21 - 22 March: EU Summit scheduled to ratify Brexit deal
29 March: Brexit day! At 11pm, the UK will officially cease to be a member of the EU
1 April 2019 - 31 December 2020: All going to plan, this is the transition period
1 January 2021: Commencement of new free trade deals that the UK has negotiated with the rest of the world.
It’s worthwhile keeping these key dates in mind when purchasing travel or foreign currency, but we’ll explain more on that later.
New Zealand is a reasonably small-sized, but highly trade-influenced economy, so it is extremely exposed to any downturn in global trade. As an example, our economy is currently waiting with bated breath to see the results of the trade war between China and the US. China is a big trading partner, so any hint of an economic slowdown in China will filter through to New Zealand and the NZD.
With this in mind, as the UK says ‘au revoir’ to the EU, it also says goodbye (kinda) to any of the trade agreements it held through the EU, including those with New Zealand.
The transition period will allow the UK to strike new trade agreements with the rest of the world, however the new agreements will not come into effect until the end of this period - 1 January 2021. Until then, the UK will continue to operate under its current agreements, hence the ‘kinda’.
The UK is consistently one of New Zealand’s top trading partners, so a new trade deal between our two countries will have an effect, as new deals could result in new (and different) tariffs. More tariffs (aka making things more expensive) will reduce demand for goods and service, which would see flow on effects for both economies and their respective currencies.
Despite New Zealand’s historical bond and ties to Britain as part of the Commonwealth, it is also imperative we maintain strong relations with the remaining EU countries, as they provide a significant contribution to our trade budget.
Why does this matter to Kiwi travellers? Well, New Zealand’s trade balance and partnerships have a direct influence on the value of the Kiwi dollar. Less demand for our exports due to tariffs means less demand for the NZD. Lower demand for our currency can diminish its value. The same thing can happen in reverse, though, so this certainly isn’t a bad news story (for us).
Tourism from the UK is a significant export* for New Zealand. The value of the pound against the NZD means a trip to New Zealand is an affordable holiday option for Poms (even with all of the sunscreen costs!). Hence all the Brits we see roaming our great southern land, often with a gnarly singlet tan as their most obvious souvenir.
As Brexit unravels, the level of uncertainty that comes as a result is putting downward pressure on the value of the pound. The result? It’s more expensive for people from the UK to visit our sunburnt country.
Whilst this won’t affect you directly as a traveller, the reduced income from tourism may flow on to the rest of the economy. Similar to trade, fewer people visiting New Zealand means less demand for the NZD, so it could affect your travel money. This is more of a long term consideration, so whilst it is worth keeping on your radar I wouldn’t get too concerned yet.
This is the big Bertha. Everyone that has travelled to the UK in the last few years has witnessed their soul leave their body as they exchange NZD for GBP and see their travel money essentially get halved.
Kudos to Britain for having such a solid currency, but damn, that transaction stings more than a green ant bite.
One positive that Kiwis have seen as a result of Brexit is the decrease in value of the pound against the NZD. Why has the pound’s value decreased? Well, Brexit is covered in an air of uncertainty. This means the GBP is less of a guarantee/ safe haven for investors than usual. Not to mention the fact that a lot of major businesses are moving their hub from the UK to places such as Dublin to ensure they still have access to the EU and the EU’s established regulations and trade deals.
Less confidence in the GBP means investors will move their capital elsewhere. This, coupled with the emigration of businesses from the UK means there is less demand for the pound. As we said earlier, less demand means downward pressure on its value. This was evident after the leave vote was announced, when the NZD/GDP value went from 0.48435 on the 23rd June to 0.52157 by the 26th June. After that the NZD continued to climb against the pound, reaching a high of 0.59192 on 03rd November 2016, 5 months after the Brexit vote was announced.
What does this mean to travellers? Let’s just say we are exchanging $2000 NZD for our trip to the UK. Exchanging on the 23rd of June at 0.521257 would give around 968 GBP. Exchanging the same amount on the 26th would give a bonus 74 GBP at around 1042 GBP. Exchanging on the 3rd of November would have given you around 1,183.84 GBP… That’s a whopping bonus of 215 GBP in your spending money - aka another nights accommodation or a ticket to a West End show. Not too bad.
These huge shifts in the pound’s value came after a relatively long stint of stability on the pounds behalf. It’s safe to say Kiwis went slightly bananas buying pound over that period.
With this in mind, the market as a whole is unpredictable, and its swings can give anyone whiplash, so there is also a chance the pound could increase in value. This is less likely, however stranger things have happened (*cough* the fact that Brexit is happening in the first place).
What does this mean for you, the Kiwi adventurer?
A decrease in the value of the pound is good for your travel money, providing the NZD fairs well against other factors (think China/US trade war). A drop in value for the pound does make a British holiday cheaper for Kiwi’s in all aspects - flights, accommodation, transfers, activities and travel money - purely because our dollar has a higher purchasing power.
*Distant cheers in the background from Kiwis planning their UK adventure*.
If the pound decreases in value, there will be resulting effects on inflation in the UK. This is because the GBP has a lower purchasing power, thus resulting in a higher cost import goods (such as food) into the UK. Suppliers and businesses will eventually need to pass these extra costs on to consumers and tourists.
So, whilst the NZD could potentially get stronger against the GBP, the long term will see these increases become relative.
We’ve got a moderate idea of how Brexit will impact the market forces behind foreign currency and the cost of a holiday. What about general mobility and booking of holidays in the UK and Europe?
Currently, Kiwi travellers have free movement between the UK and EU countries. Depending on what is agreed upon during Brexit negotiations, there may be tighter border controls. While this potentially means more stamps in your passport (yay), it could result in longer queues at border points (boo).
The cost and accessibility of flights between the UK and EU may be impacted, especially low cost carriers. More information around this will be released closer to Brexit day.
Finally, reduced immigration from the EU may mean more work opportunities for Kiwis in the UK, however a lower pound value and a slowing British economy could result in lower earning potential for those jobs.
With all of this in mind, we’ve compiled a list of recommendations to ensure Brexit doesn’t take a dint out of your spending money, and perhaps leaves you taking off with more.
At the end of the day, we honestly don’t know what will happen to the pound as a result of Brexit.
Since the initial Brexit referendum, there have been mixed economic signals in the market. However, each time Brexit becomes significantly more likely there is an undeniable signal that sees the pound drop in value against the NZD.
Take from that what you will. If nothing else, educate yourself. Who knows, you might just make some travel money bank from it.
*Why is tourism an export and not an import?
An export is essentially New Zealand exchanging foreign money in exchange for New Zealand goods/ services. Conversely, an import is when we exchange New Zealand money for foreign goods/ services.
As international tourists are injecting their foreign money into the Australian economy in exchange for Australian goods and services, it is counted as an export.
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