INSIGHTS BLOG

BREXIT - DEAL OR NO DEAL

Mark Lister, 11 December 2018

There is no shortage of things for investors to worry about at present. Slowing growth, ongoing trade tensions, and hypotheses about the yield curve have dominated headlines.

As markets fret over these concerns, the train wreck that is Brexit has received a little less attention.

This week was shaping up as an important one for the Brexit timeline. The British parliament was scheduled to vote on the draft withdrawal agreement that had been agreed with the European Union (EU).

This 585-page document included provisions on citizens' rights and many other details ahead of Britain's official departure from the EU at the end of March.

Prime Minister Theresa May required a majority vote in support of the deal, but called it off when it became clear the deal would be rejected.

It looks like May will head back to the negotiating table with the EU, which is risky and could well be a futile exercise. She and the EU had previously described the current agreement as not only the best deal, but the "only possible" one.

We could also see a ‘no deal’ Brexit, where the UK leaves without any agreement in place. The Bank of England ran a few scenarios to estimate what that might look like, and they’re ugly.

It suggested trade could fall 15 per cent, and depending on the level of disruption, the economy would contract between three and eight per cent.

This would push inflation and interest rates higher, while unemployment would rise materially. House prices would fall between 14 and 30 per cent, and the British pound would depreciate by 15 and 25 per cent from current levels.

The Bank of England even used us as a case study, analysing the trade disruption New Zealand experienced when we lost preferential access to the UK market in 1973.

The UK was our biggest trading partner at the time, taking almost a third of our exports and accounting for around eight per cent of our GDP. The transition was painful in the years immediately after, but we’ve more than moved on.

Today, the UK represents less than four per cent of our total exports, as our focus has shifted to the likes of China, Australia, the United States, Japan and Korea. All of those places are more accessible geographically, and many are growing a lot faster than the UK.

A few economists have dismissed the Bank of England’s doomsday scenarios as outlandish. Maybe they are, but a no deal Brexit isn’t exactly a desirable outcome regardless. Neither is another election, for which there is an outside chance.

A final option is a reversal of the original Brexit decision. More than a few Brits might be keen to change their vote with the benefit of hindsight. While such a dramatic change of course seems unlikely, many would argue it is the most sensible move.

The upcoming period will be crucial for the UK, financial markets and the beleaguered British currency. The proposed deal may have been far from perfect, but the alternatives aren’t great either. At this point, it feels like the only thing the UK can bank on is with certainty, is more uncertainty.

Top