Trainee Trader Jaz Singh’s article on the uncertainties surrounding the UK economy…
October 5, 2016The UK may have decided to leave the EU but, at the time of voting, the exact structure of this exit was not decided. We now have a clearer idea as to the type of Brexit we shall face after Theresa May’s comments at the Conservative party conference. Previously, discussions have taken place looking at 2 options for Brexit: ‘hard’ or ‘soft’. A hard Brexit implies the UK destroys all its current trade ties with the EU and takes up World Trade Organization (WTO) rules instead; a soft Brexit is where the UK joins the European Economic Area (EEA). In this situation the UK can remain a member of the single market but would not be able to influence the bloc’s rules. We can infer from May’s recent comments that the Brexit will veer towards a harder agreement. The PM mentioned that Article 50 will be invoked no later than March 2016. Moreover, Bloomberg sources have found that UK financial services will not get a special deal from the negotiations. Once Article 50 has been invoked the UK has 2 years to negotiate its departure from the EU.
The vote to leave was largely unexpected as seen by huge fluctuations in the value of sterling and UK equities in the aftermath of the vote. In hindsight, we can see that very little thought was given to how the Brexit would be structured before the vote; the mere shock of leaving the EU itself led to the asset price fluctuations we saw post-Brexit. With a particular nature of Brexit not priced into financial assets at the time, we now see the FTSE 100 and sterling breaching the Brexit highs and lows respectively.
To date the UK has seen plenty of benefits as a result of Brexit: the FTSE 100 has risen due to sterling weakness and further stimulus has been provided by lowered interest rates. Plenty of data after the vote shows the UK has shaken off the Brexit jitters for now, such as the construction PMI for September. These moves have extended since the PM’s recent comments implying a hard Brexit. However, the longer term outlook seems less rosy. There is uncertainty regarding the timeline of potential trade deals. With lengthy negotiations expected, a fall in investment levels in the UK due to prolonged uncertainty is likely. Previously planned investment may go ahead but it could be deemed too large a risk to invest in the UK until trade deals have been confirmed. Expect the UK, at least for the short term, to lean on WTO rules until it is able to negotiate trade deals with other major economies.
