Alpesh Patel’s Political Sketchbook: Hard Times Hard Brexit

Alpesh Patel Thursday 17th January 2019 12:41 EST

There are countless opinions on Brexit. I thought I would give a holistic idea about the  general sense of chaos that has blanketed the country by backing those views and opinions with adequate research and references. 

First, let’s by discussing if the British government chooses a hard Brexit. As a reminder, a hard Brexit, among other things, would compel the government to withdraw its access to the EU’s single market and could lead to a withdrawal from the EU’s customs union. If this scenario does occur, you can expect a strong negative reaction and possibly a backlash from businesses and asset classes.

Let’s start with imported goods. The IW Institute in Cologne has estimated that exports from the rest of the EU region to Britain may fall by as much as 50 percent The UK’s exit from the EU’s customs union, according to the IW Institute, may lead to a loss of more than 15 Billion Euros of annual tariffs on both the UK and EU-based companies. These tariffs, quite obviously, will potentially lead to a domino effect of imposing higher costs on other  industries. 

For example, according to the British Retail Consortium, the cost of food and beverage imports from the EU may increase by as much as 29 percent and the cost of imported goods like clothing, textiles and other FMCG products may rise as much as 7 percent. Higher imported goods will likely cause a ripple effect through the entire British economy, specifically harming British corporations that heavily rely on imported raw materials from the continent. Increase in import duties will ultimately flow down to British consumers, causing them to curb their spending and impact the overall economy. Along with harm to British consumers, the impact of a hard Brexit will spread throughout the continent, particularly to manufacturers in Germany.

Specifically looking at the currency markets, a hard Brexit would, of course, impact the price of sterling. Since the Brexit referendum in 2016, markets have operated under the assumption that a hard or soft Brexit represents a binary outcome, with a hard Brexit indicating a negative outcome. You can clearly see this trend by looking at the rise and fall of the British pound. The pound has sharply reacted to news about Brexit negotiations, falling as negotiations hit roadblocks and rising as it appears that a deal will ultimately be made. And we expect this trend to continue. The British pound would fall upon a hard Brexit actually occurring, with UK-based international earners to outperform domestic UK stocks. These international earners would outperform from the appreciation of the dollar after a hard Brexit. According to the International Monetary Fund, a hard Brexit could cost the UK about 6 percent loss of the gross domestic product.

Ultimately, there is a higher likelihood of a recession in a hard Brexit scenario versus a soft Brexit scenario. According to ratings agency Standard & Poor’s, this recession could last a year or even longer. The UK’s unemployment rate would climb to more than 7 percent by 2020 and home prices would drop by approximately 10 percent over two years. Household incomes would fall annually by £2700 between 2019 and 2021, and inflation would rise to 4.7 percent by the middle of this year.

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