The Impact of a Nodeal Brexit on the UK Economy

The impact of a nodeal Brexit on the UK economy International Banking, Finance and Risk Management Introduction As it turned out, Brexit is a very long process which will modify the structure, shape and procedures of today’s European Union. Its foundations originate from decades and it will reflect on the generations to come (Adam, 2020). He indicates that there is a huge amount of uncertainty about what role the United Kingdom will play after Brexit which points out a chaotic separation process. Further he states that Brexit is not only an issue of economics and finances – it is more a question of “the English nationalism” (Adam, 2020, p. 7). This implies some fundamental questions in the UK – “Where does sovereignty reside? What is the right balance and the legislative between powers the executive powers of government of Parliament? How do four nations live peacefully under the common roof of one monarchy?” (Adam 2020, p. 7). The answers will only be found out with the time, however, one thing is for sure – Europe and the UK will never be the same again. “The UK's exit from the EU represents a change in its relationships both with the EU and the rest of the world. The UK will be leaving the Customs Union and Single Market, which determine how goods, capital, services and people move between the UK and the EU. The UK will also be implementing an independent global trade policy which allows the UK to sign new Free Trade Agreements (FTAs) with non-EU countries” (HM Government, 2018). The Government report (2018) further indicates that in the long run the EU exit is just one factor that will impact the economy in the UK. It reveals that influence will also have the wider global trade and tendencies in investments – for instance new technologies and increase in emerging markets. Direct consequences for the UK in case of a no-deal scenario One word describes very accurately the Brexit situation to the United Kingdom and it is uncertainty – for nationals from EU countries about their future, for companies and financial institutions, for banks and the trend for the economy as a whole. London is one of the world’s biggest financial centres. It generates one-fifth of the economy of the whole country. Additionally, it is estimated that 40% of the investments are addressed in London and some of the biggest corporate giants are based over there (Chapman, 2018). Further he points out that 30 financial institutions, among which JPMorgan and Morgan Stanley, will move their base from the UK to Frankfurt which means that London is set to lose €800bn (£711bn) worth of assets. As a result of this, according to a new research, “the UK will have lost 10 500 finance jobs to other European cities by day one of Brexit” (Chapman 2017). It has been revealed that 26 companies so far have announced that they will move their operations to Dublin and Frankfurt. He claims that a no-deal Brexit is seen as damaging for the financial sector in the UK which, according to the House of Commons’ figures was worth £124bn to the UK economy in 2016. As outlined by Campbell (2017), 500 of the biggest companies in Europe have their headquarters in London and as described by the Mayor Sadiq Khan a full exit from the EU market would be “economic self-sabotage”. This would be devastating for the industry and would bring business risk scenarios affecting company’s profitability resulting in a shrinking of the economy in case of a no-deal. “The United Kingdom is in danger of losing its reputation as rational, predictable and stable business environment” (Adam, 2020, p.236). He also suggests that the chaos over Brexit may result in a decrease in the appeal for investments in the country as a whole. Moving further, these statistics are surpassed by the advantages of the single market. According to the BBA Trade Association (2017), “more than a third of the UK’s financial services surplus comes from trade within the European Union”. Additionally, they state that a big part of the activity related with financial markets in the EU is located in the UK. Hundreds of billions of euro go through London like derivatives and other financial instruments - like European pension funds and insurance companies, for instance. It is estimated that 80% of the derivative instruments are hedged in London so it is not quite clear how the stock relations will continue if a no-deal comes into force (Chapman, 2018). As the former chancellor Philip Hammond stated for Independent, remaining in the single market would give UK economic advantage (Chapman 2018). Given that the EU is a free trade area, it would be against the UK interest leaving the Union and incurring tariffs as a result. Thus, the import of goods will become more expensive in case of a no-deal which will increase the imports and decrease exports. This, in turn, will lead to cost push inflation resulting in the domestic goods being cheaper in world markets. As a consequence of that, the current account balance of the country will increase. However, as pointed out by Parker (2019), the Government had set out a temporary tariff regime which would be applied in the case of a nodeal scenario. He reveals that in this way 88 per cent of the goods entering Britain would not carry import taxes for a one-year time. Additionally, Parker (2019) states that The Treasury “wanted to keep tariffs low in the event of a no-deal exit to avoid fuelling inflation in a highly volatile economic situation.” On the other side, the author points out that this brings uncertainty in regards to the UK trade relations as, for instance, Canada is one of the countries which is holding back from negotiating a new trade deal because the anticipation is for them to make exports to Britain with decreased or no tariffs at all in a no-deal Brexit. According to a Government trade analysis, Britain could have success “in signing free trade deals with the US and a range of other big non-EU economies after Brexit, such as China, India and Australia” (Sabbagh, 2018). As discussed so far, being in the Single Market would give a lot more benefits to the UK like standardized products, no transaction costs and no exchange rate risk. In this respect, crucial to consider is how the British currency would be affected if a no-deal occurs. As Martin (2019) indicates for Financial Times, the sterling has collapsed to a two-year low against the dollar, its main benchmark, and also against the euro. If pound weakens against all currencies, the UK balance of trade deficit will likely be smaller. Consequently, there would be strong demand for British export goods. On paper, a weak pound stimulates foreign demand for UK products which is good for exporters and hence could reduce unemployment. However, devaluation can cause a fall in wages due to increase in inflation. Since the Referendum in 2016, the devaluation of the pound is around 15 per cent less than before the vote (The editorial board, 2019). As per the Resolution Foundation (2019) cited in The Editorial Board (2019), in the last 2 years the “real incomes of the those below retirement age fell at the fastest rate ever outside of a recession.” According to an economic analysis elaborated by a range of Government departments including the Treasury, in the event of a no-deal Brexit, the GDP will be lowered by 6.7 per cent in 15-years time “assuming there is no longer any net migration into the UK from the EU and European Economic Area (EEA) after Brexit” (Sabbagh, 2018). Similarly, it has been assessed that after 10 years GDP per person would be £2,500 less under no-deal compared to staying in the European Union which would affect public finances by up to £49bn according to the study (Kentish, 2019). “However, these could in part be mitigated by a more liberal immigration policy” (Professor Jonathan Portes cited in Kentish 2019). In this respect, this will push the national debt to over 85.9 per cent of national income which would be the highest level since the mid-sixties (Channel 4 News, 2019). Furthermore, the analysis assumed that the EU would also suffer a big impact on the income per capita which would be expected to fall in all of the 27 EU countries. Britain respectively would be hit the most, however “Ireland would also see a fall of more than 2 per cent, and the Netherlands, Belgium and Hungary would also suffer” (Kentish, 2019). Conclusion Based on the analysis for a no-deal scenario, it can be evaluated that “Brexit will profoundly change the political landscape in the United Kingdom for many years to come.” (Adam, 2020, p. 208). To be able to assess the consequences of Brexit for Britain or the European Union would be a notional business as there are so many undecided details about the situation. No one can precisely forecast how heavily would Brexit hit the economy and what the actual consequences would be. However, as Adam (2020, p.226) emphasizes, “the economy, the Single Market and foreign trade are still at the heart of the EU (…) and its implications will be felt foremost in the economy and in trade”. Finally, taking into account the high degree of uncertainty, one thing is for sure – Brexit would lead to an inevitable decrease in GDP whatever the outcome of the negotiations.