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

What do you think the impact of Brexit will be on the UK economy?
The short-term impact will depend on the final deal. Uncertainty is a weight on growth, but this drag will lift once a final Brexit form is known, and much depends on whether a customs union with Europe remains. An agreement that separates the UK from the continent could cause shorter-term disruption as industrial supply chains are reshaped. Despite the prophets of doom, London will remain at the centre of financial markets. Some initial slippage may occur, with potential knock-on effects in areas such as property prices, while talk of potential food shortages seems wildly hyperbolic.

In the long term Brexit is likely to bolster the UK economy, regardless of the shape of any agreement. Freedom from the structural rigidities and huge costs of the European bureaucracy could be a relief to the UK economy. The UK’s status as a free democratic state with strong rule of law will serve it well. Additionally, the social impact of a newly independent Britain is left out of most economists’ calculations, but could be an important driver of an economic upswing.

Do you think Brexit will have an impact on EU economies?
Losing one of its most wealthy and vibrant economies is likely to have a negative effect on the EU. Worse, the departure means a less stable union, with more incentive for weaker nations to hold the union to ransom. The UK has often played the role of the voice of reason in pan-European discussions, and Brexit would mean a less stable community and higher uncertainty about the long-term future. Naturally, these factors are likely to hurt EU economic prospects.

What do you think the eurozone might look like in five years?
Lower stability and cohesion makes predicting the long-term shape of Europe a difficult exercise, but there could be a possibility of a fracturing along north and south lines. Growth rates might be threatened, and population increases could see Europe undergo a radical social transition as it attempts to import vitality from newer members and neighbouring areas.

Which markets do you think will be most heavily impacted by Brexit?
A reshaping of the European financial systems may see debt and capital markets hit hard initially. However, auto-manufacturing and agriculture industries may see greater long-term change.

How could the pound react after Brexit?
The pound could remain under pressure throughout the transition period, held back by uncertainty. Its already defensive positioning should limit downside against the US dollar and the euro. Post-Brexit, the strengthening of the UK economy may start a long-term uptrend in the pound.

 

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