Our UK chief market analyst, Michael Hewson, answers some of the key questions around Brexit and its potential impact on the economy.

What impact do you think Brexit could have on UK and EU economies?
A lot will depend on the nature of any deal that the two parties are able to come to. While it can be argued that a change of trading relationship will introduce potential new trading barriers, it is possible that free from some EU rules and regulations, the UK will be able to forge new relationships with third party countries more easily than it could as part of a 28-member bloc. A ‘no-deal’ Brexit doesn’t have to be the disaster many expect, simply because it’s in no one’s interest to crash another’s economy. If anything, a messy Brexit has the potential to hurt the EU more given London’s role as banker to the eurozone.

What do you think the eurozone might look like in five years?
If the eurozone doesn’t reform the way it works, in terms of fiscal and monetary policy, there is a real danger of countries leaving the euro. The euro as a currency – while a good idea in principle – has been an exercise in monumental folly in my opinion, tying completely different economies into a single interest-rate framework. The problems in Greece, as well as the high levels of youth unemployment elsewhere in the region, speak to a direction of travel more tied to political ideology than common sense.

Which sectors do you think will be most affected by Brexit?
Banks, home builders and retail companies are all likely to be affected by a messy Brexit, but as with everything, much will depend on how any future relationship plays out.

Do you think Brexit will impact house prices?
Again, this depends on the economic fallout, although generally interest rates tend to be a better barometer of house price growth. In any case, we still aren’t building anywhere near enough houses in the UK to meet demand, which should offset any downside. Future government policy, as well as interest rates, are likely to be the ultimate arbiters of future house prices.

How do you think Brexit will impact the financial sector?
The financial sector could lose a few jobs as a result of Brexit, but in the long term the UK needs to reduce its reliance on these sort of roles anyway. Focusing more on other sectors it wants to grow could help the UK succeed in a post-Brexit world.

How could the pound react after Brexit?
Because the UK has its own central bank, it will be well equipped to adjust policy to suit the economic consequences of both a ‘soft’ or ‘hard’ Brexit. The pound may drop initially in the wake of a no deal, however, as long as the government implements policies that are growth friendly any fall should be short lived. On the other hand, if the political reaction is inept (which is quite a high probability, given the current calibre of politicians) then this could retest the pound’s multi-year lows against the euro and US dollar.

 

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