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How will Brexit Affect the UK Financial Market? Will the UK lose its financial standing once it leaves the European Union? London, after all, still retains its crown as the world’s leading financial centre – but for how long?
It’s a question that is currently on the minds of politicians, businesses and employees both inside and outside of the UK. Traders, looking on from the outside, will also be keen to understand what it will mean for their investments.
While no-one currently has the clarity they desire, it pays for all concerned to consider the ways in which Brexit could affect the financial market – that way contingency plans can be made – and the ways in which the effect of the vote last June has already been felt.
OECD issues stark warning over Brexit no deal
The first thing to note is that there has been increasing talk of preparations being made for ‘no deal’ when it comes to Brexit. While some feel this is a negotiating tactic on the British side to try to convince the EU that we could walk away from talks if progress isn’t made – others have raised concerns that this is apparently being considered.
Recently, the Organisation for Economic Cooperation and Development (OECD) warned that leaving the EU with no deal could wipe £40 billion off the UK’s GDP growth by the end of 2019.
‘No deal’ is the most dramatic of outcomes and would probably lead to the most upheaval for the markets as it would leave uncertainty over the trade of goods across the border, the passage of flights in and out of the UK and the status of large numbers of people in and out of the UK. No-one really knows what this would mean for the UK’s ability to sell into Europe or vice-versa – but this is a ‘cliff edge’ that businesses and many politicians want to avoid.
The impact of Brexit so far
Yet the OECD’s report isn’t just about gazing into a crystal ball and warning of the impact of a ‘no deal’ on the UK economy. It also spells out a number of ways in which we can already see the impact of the vote.
As Business Insider notes, this includes:
- Since the referendum in June 2016, UK GDP growth has fallen well behind the OECD and EU average.
- While the FTSE 100 and FTSE 250 have grown since the summer of 2016 – their performance is skewed by the proportion of overseas firms listed. When looking solely at UK-focused stocks, these can be seen to have underperformed significantly by comparison.
- Labour productivity has fallen even further behind rivals.
- Inflation has risen and reduced ‘real incomes’.
- The fall in the pound after the vote has not yet boosted exports.
- Many of the least well-off parts of the UK rely heaviest on EU money – which serves to highlight the over-reliance on London.
Many feel the sluggish GDP, UK stock performance, labour productivity, inflation, weak pound and London reliance will only be exacerbated when the UK finally leaves the EU in 2019.
What should we look out for when it comes to the ‘Brexit effect’?
There are a number of things to watch out for during and after the negotiations.
Currency: Anybody engaged in forex trading will need to pay special attention to the negotiations. The pound is already worth significantly less than it was before the referendum – but a breakdown in talks could easily lead to another dramatic drop in value. Such volatility is a feature of the forex market – and traders will need to be on the ‘right side’ of the trend.
Bank passport: Much of the UK’s financial might rests on the financial services sector. Overseas banks have been able to set up in the UK and operate right across the EEA (the EU, plus Norway, Iceland and Liechtenstein) thanks to what’s known as the ‘bank passport’. If the UK doesn’t negotiate for this to continue, big banks will need to open new bases within the EEA area to operate as they do now and might be faced with a choice – do they keep their London base, downgrade it or even close it completely and replace it with a new facility? The latter two could result in money, skills and expertise leaving the UK.
Tariffs and non-tariff barriers: Leaving the Single Market could well result in the UK paying tariffs on the goods it imports – covering everything from components to cheese. Yet, while this is significant, so too are the imposition of non-tariff barriers. Having to impose country of origin checks, for example, could create a long and costly delay to trade and be every bit as significant as financial tariffs. The imposition of these could trigger a further reduction in the performance of UK companies and the country as a whole.
The impact that Brexit will have is far from clear at the moment. However, the trends so far should serve to give traders and businesses alike the evidence they need to brace themselves for what might be to come in the short and medium term at least.