Our UK Market Analyst, David Madden, discusses his thoughts on Brexit.
What do you think the impact of Brexit will be on the UK economy?
It all depends on the outcome. The current draft agreement that has been proposed is very business friendly, and if it goes ahead there shouldn’t be too much disruption to the UK economy. Once the withdrawal agreement has been put to bed, the UK and the EU can then focus on the future trade agreement. The deal surrounding services, and in particular financial services, will be of major importance. Once again, the outcome of the trade agreement will determine how the economy fares. If the new trading relationship with the EU looks similar to the current one, then the economy is likely to continue at its current trajectory. The more restriction placed on trade between the UK and other EU countries, the more damage it could do to the British economy.
Do you think Brexit will have an impact on EU economies?
The rest of the EU is economically tied in with the UK, so the performance of their economies will be reflected in what kind of Brexit is finalised. A ‘no-deal’ scenario is likely to have a negative impact on the EU economies, as trade between the UK and European countries would be done on World Trade Organisation (WTO) rules, and that would entail tariffs. If a deal is worked out and there is little deviation from the current trading relationship, then I think the impact on the European economies is likely to be small.
What do you think the eurozone might look like in five years?
It’s hard to tell what the eurozone will look like in five months, let alone five years. The currency bloc has serious structural issues, as the region’s banking system is still struggling to deal with non-performing loans. The current standoff between Italy and the EU over their budget has the potential to trigger another round of the eurozone debt crisis. The longer the political fight continues, the more pressure we could see on the Italian government bond market and in turn the domestic banking system. Elsewhere, unless Greece receives genuine debt relief, their economy will limp along irrespective of the Italian situation.
Which markets do you think will be most heavily impacted by Brexit?
The pound is the most sensitive market when it comes to Brexit, as the currency essentially reflects the economic prospects of the country. Depending how much of a success or failure Brexit is, the Bank of England might need to alter interest rates, and that is likely to have a large impact on the pound. The FTSE 100 could also be impacted, partially because the pound impacts the constituents of the index, but also because the earnings potential of the companies would be a factor too.
Which sectors do you think will be most affected by Brexit?
The housebuilding sector and the banking industry are likely to be the most impacted by Brexit. The UK property market is overstretched, and is already showings signs of cooling. Some individuals are holding off from buying a house until after Brexit. On top of this, some construction companies have complained about skill shortages, and the UK might struggle to attract the right workers post Brexit. A disorderly Brexit could also lead to looser monetary policy from the Bank of England, which could reduce the earnings potential of banks. A higher interest rate environment usually leads to higher profitability at banks, so an interest rate cut from the Bank of England might lower banks’ earnings potential.
Do you think Brexit will impact house prices?
A smoother Brexit outcome will mean less of an impact on house prices, but a hard Brexit is more likely to weigh on property prices. The British property market is already overheated, as low interest rates, competitive lending policies and the help-to-buy scheme have driven prices up. Any indication that Brexit could hurt the UK economy is likely to also weigh on prices.
How do you think Brexit will impact the financial sector?
It all depends on what sort of deal is struck regarding financial services. At the moment the talks have focused on goods only. If the new trading relationship is very similar to the current trading relationship, then the impact on financial services should be small. If UK financial services companies are worse off post-Brexit in terms of the new trading relationship, then we could see a slump in the sector, as banks might find themselves in a situation where their lending earnings potential is diminished. Insurance companies and fund managers could see their assets fall in value.
How could Brexit affect interest rates?
The UK economy is in good shape, unemployment is low, inflation is falling and wages are rising. A ‘soft’ Brexit could see the economy continue to tick along, and the Bank of England might look to hike interest rates once per year for the next few years. A ‘hard’ Brexit could bring about interest rate cuts as the economy might need to be supported.
How could the pound react after Brexit?
A Brexit that is ‘good’ for business could push the pound higher, as there has been much uncertainty hanging over the currency. A ‘hard’ Brexit is likely to push the pound lower, as the Bank of England might need to loosen monetary policy in order to support the economy.