The United Kingdom is still in the planning and negotiation stages of its long withdraw from the European Union. Many in the UK are now facing the reality that a no-deal Brexit will be the most likely outcome. In this scenario, the UK will get no special deals on trade from the EU, leaving Britain as just another entity for Europe to negotiate with. Even if the damage is indirect, a no-deal Brexit will hurt international investors with interests in the UK.
These are three areas where a no-deal Brexit will be felt the most.
The Brexit and Global Economy
A no-deal Brexit has no promise of benefitting the UK economy in the short or mid-term. The uncertainty that would follow would reduce investment (both domestic and foreign), GDP growth could be impacted, and job losses will likely occur as some companies refocus their attention to Europe. Ireland and the Netherlands would likely also be impacted, due to their close economic interdependency with the UK.
According to the International Monetary fund, a change in trade relationship between the UK and Europe would lead to 4% less GDP growth for the UK, and 1.5% less growth for the EU.
Investment Market and Currency
Financial markets will be the most vulnerable in the case of a no-deal Brexit. The British Pound will be particularly tested during the transition period, and likely for many years beyond. European debt issued in Britain will no longer comply with EU regulations, and this could lead to uncertainty on both sides of the English Channel.
Asset managers are concerned because a combination of an unstable stock market and a weakening Pound could cause significant damage to portfolios. Managers are now developing contingency plans as they await the UK government’s own plans to be announced next week.
The UK will revert to standard WTO rules when dealing with the EU after Brexit. The UK government has been public about wanting to establish a free trade agreement with the US to offset damages from Brexit, but this is likely to take some time, and may not be possible at all. In the worst-case scenario, a weakening Pound and unstable financial markets will make new trade agreements even harder to negotiate.
Brexit was presented to the British public as beneficial to workers and the economy. The reality is that Brexit is likely to be painful, costly, and detrimental to growth. Investors should look cautiously at the UK market for the meantime, and upcoming announcements from the government regarding contingencies and stopgap measures should be observed closely.
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