The UK Government are now preparing to invoke Article 50, beginning the official process of an EU-exit by which negotiations will take form. To the surprise of many economists, the UK has shaken off many of the doom and gloom forecasts predicted during the Referendum campaign, with many sectors of the UK economy performing above analyst’s expectations.
It’s worth point out that the UK has not left the EU, and is still governed by the political, economic and social frameworks that make up the 28-member state union, and until the UK completes the 2-year window in which it hopes to secure a free trade agreement, will remain governed by the many strings that many UK businesses depend on.
Access to these core markets will be what makes or breaks the UK economy, and any suggestions that the UK will be better off securing trade deals elsewhere ought to be dismissed as wishful thinking.
One of the UK’s largest sectors, the financial sector, allows the UK to offer financial services to all European member states through the common framework of passporting rights. This also allows UK banks to set up operations in not just EU, but EEA and EFTA member states and vice versa. Most Euros are cleared through London’s financial hub, before finding their way to and from its sister city in New York.
On a similar but separate note, the UK exported almost 50% of its goods and services to the EU and it’s entirely possible, according to Theresa May’s manifesto, that the UK may put itself in a position to default to WTO terms if a bad deal is struck.
While this would allow the UK to impose import duty on goods and services it would also force member states to look elsewhere for cheaper alternatives.
The reverse is true for UK businesses, who face the likelihood of raising consumer prices on EU imports to plug the gap created by higher tax duties, a move that could cost the UK consumer significantly.
Will the UK economy continue to hold?
It’s fair to say that the UK economy has in most parts, remained intact since the vote last June. The weaker Pound has helped the Manufacturing sector, but higher inflation could become a problem for the UK.
There are questions and theoretical outcomes that need to be explored, certainly a weaker Pound as a current member of the EU may soften the blow to the Brexit, but outside the EU, the weaker Pound coupled with WTO tariffs may present a different picture.
Next week or possibly the week after, the UK will begin the official process of exiting the EU and British businesses will then need to make some estimated guesses based on a lot of unknowns. The biggest worry of all lies in the prospect of dirty and difficult discussions which could leave the UK with no deal. David Davis the Brexit secretary has just this week admitted that no analysis has been done on this potential option, and that should be raising alarm bells for Sterling investors.
