What Lies Ahead in the Medium Term Future for UK
The recent Brexit vote does not herald the end of the world, and in all probability the sell-off in risk assets and sterling will soon be partially reversed as the U.K government and euro zone leaders make calming statements about the need to work closely to achieve a harmonious break up.
The leadership of the Brexit campaign team that probably lead a new U.K government do not, at heart, believe in the anti-immigration, ‘Little Englander’ rhetoric that many of their supporters expressed. Therefore, while a new government will be more right wing it is unlikely to be protectionist or anti-capitalist in flavour. It’s likely the U.K has not in fact left the E.U, but will acquire a quasi-membership status, similar to Norway or Switzerland.
- The fall in sterling will result in higher U.K inflation, credit conditions are likely to tighten as inter-bank lending rates reflect an increased political risk premium, aggravating delays we will see in decision making over new investments in the economy. A rise in the cost of commercial borrowing will lead to a rise in household mortgage interest rates, putting downward pressure on an expensive U.K housing market.
- However, Sterling’s fall will help counter some of the above by providing a boost to exports and provide some help to domestic-orientated firms as they compete against imports.
- The E.U economy will also be hurt, with growth negatively affected, on account of the U.K being the second largest economy in the E.U and the Brexit campaign has been followed closely by other euro-sceptic parties. The impact will occur through three channels: heightened political uncertainty over the E.U project in general, and specifically the ability of the euro zone to build the political and fiscal union needed to created a fully functioning euro currency. Second, the improved price competitiveness of British exports within E.U markets and around the world will weaken the profitability of other E.U companies, and third, weaker demand in the U.K for E.U goods due to higher prices and a weaker U.K economy.
Update Jan 2021 – I wasn’t very far away from what actually happened!