Brexit, Britain’s withdrawal from the European Union (EU), became official when 52% voted to leave in the 2016 referendum. Britain was to leave the EU by the 29thof March 2019. However, Brexit is delayed, and uncertain, as British politicians attempt to make a deal with the EU.
In this scenario, Britain would make a definitive split from EU by removing membership to the European single market, European customs union, and the European Court of Justice. In turn, imported goods would become more expensive, and Britain would lose its ability to trade freely with European partners. A hard Brexit allows Britain to make their own trade rules. However, this could take a while, meaning Britain would temporarily use the less favourable World Trade Organisation rules.
Unlike a hard Brexit, Britain would immediately leave the EU without a transition period. Providing no chance for Britain even to negotiate free trade deals. British laws would be separated from the EU, tariffs of foreign companies in Britain would commence immediately, and the UK government would establish a hard border along Northern Ireland.
A no-deal could cause significant economic impacts. For example, the IMF forecasts that a no-deal will cause a two-year recession in the UK. A recession would further weaken the British Pound and reduce GDP growth. Additionally, the end of free trade would see import businesses incur the cost of higher tariffs. However, Britain could mitigate this economic impact by quickly reaching new trade deals with other countries, as seen with South Korea, Central America, and Switzerland.
In this scenario, Britain would remain in strong alignment with the EU. Britain might even stay in the European single market or European custom unions. Softer Brexit would benefit British businesses that depend on intentional trade. However, a softer Brexit could deny Britain the ability to make trade deals with the US, China, or India. Furthermore, a softer Brexit could be viewed by citizens as a betrayal to the referendum or British democracy.
Besides the entrenched uncertainty behind Brexit, the withdrawal itself could significantly impact the value of the British Pound (GBP). The GBP has decreased from 1.7000 (2014) to 1.2500 (2019).
British government debt was at£1,821.3 billion (Q1 March 2019). If leaving the EU causes a recession, as predicted by the British Treasury and International Monetary Fund (IMF), Britain’s debt could increase. If the Bank of England (BOE) respond to their debt with an expansionary monetary policy, then inflation is speculated to rise. Expansionary fiscal policy is when a government increases money within an economy by lowering short term interest rates. However, as people’s buying behaviour increases, so too does prices and inflation.
In turn, instability, negative speculation, increase in government debt and inflation would cause a decrease in the demand for the GBP and thus a decline in its currency value. If the GBP were to decrease, it would be recommended to short the GBP/USD currency pair. Alternatively, currency traders could look to go long on the USD/GBP currency pair. Primarily, because the USD is a safe haven.
To conclude, investors are advised to read Brexit updates and prepare their portfolios for a potential No-deal Brexit and decline in the GBP.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by associate Patrick Mc loughlin