With the UK scheduled to leave the EU on March 29, 2019, Brexit negotiations have been a top concern. Every decision and development made over the next 6 months will have lingering effects and are sure to greatly impact financial markets all over the world.
There is a good chance now that Britain could exit the EU without a deal, if Prime Minister Theresa May’s cautionary speech in the UK Parliament on July 2018 is to be believed. The impact of this would be massive for the global markets.
1. Trade Transaction Costs Will Increase with New Tariffs on Exporters
The UK will have to leave the European Customs Union, which means a significant increase in controls over UK-manufactured goods crossing the European border and huge delays in administration formalities.
The BRC has predicted a 29% increase in food and beverages product prices imported from the EU and a 7% increase for non-food items, including clothing and textiles. Pricier imported goods will put a strain on consumer spending, affecting the economy on the whole. In addition, businesses that depend on EU-based raw materials and consumers will have to bear margin cuts. This will have significant repercussions on the global stock and forex markets.
2. GBP/USD Could Tumble Down
Currencies are always affected by trade balances. Britain’s current account deficit has been widening for some years now and Brexit will put a likely stop to the inflow of foreign capital. This means the UK would lose its position as being a prime investment location. What eventually will follow is a weakening of the pound sterling, to address the imbalance created. Experts are predicting similar downs for the British pound like what happened following the Brexit referendum. The GBP may go down as low, perhaps more to the tune of 1.20 against the USD.
3. UK-Based International Earners Could Gain, While Home-Based Stocks Would Fall
With the appreciation of the US dollar, UK-based companies situated abroad may outperform. However, with the domestic currency declining, home-based stocks would take a hit. EU-based firms would see their trade with the UK becoming expensive, which will result in massive sell-outs in the European markets.
4. London Property Prices Could Go Down
Since 2012, property prices in London have been escalating, due to the city’s strategic prominence as a global financial hub. This has led to overvaluation of the pound sterling, pushing up exchange rates. Investors put their money into real estate, a safe-haven asset, causing more capital inflows into the country.
After Brexit, the city will no longer be positioned in a large market, causing outflows of property funds. Since the referendum, London property prices have gone down remarkably.
5. The Bank of England Would Slash Interest Rates
We had seen a resilient British economy after the referendum. This can be attributed to the pre-emptive lowering of interest rates by the BoE, to calm the markets. Inflation has, however, been rising in the country for some time, due to high oil prices and a weaker pound.
After March 2019, inflation levels could further escalate, pushing the British central bank to hike interest rates. But, a tighter monetary policy would likely occur if the unemployment rates are high, so a lot depends on the growth rate in the future.
Experts are still hopeful that PM Theresa May will overcome the hurdles and manage to strike a deal with the EU. It is not as though only the UK will be affected by a no-deal scenario. The cost of capital for European businesses will rise too, which will weaken the EU economy, already in the doldrums.