What’s next for the UK economy and Brexit right now
01 June, 2019
Remember when a Brexit was all but a done deal? It looked that way in November 2018, when the European Commission endorsed Theresa May’s pact 18 months after negotiations began. In the space of six months, though, Britain’s leadership has suddenly steered their ship towards the rocks once more.
Since that time, May’s deal failed in the Commons thrice. She was set to make a fourth attempt later in June, but on May 24, she saw the writing on the wall. She tendered her resignation, putting the UK back on square one with four months to go until ‘no deal.’
What does this all mean for Brexit and the UK economy? We’ll break down the past month’s shocking developments and their impacts in today’s blog.
Brexit: a primer
Not up to speed on what Brexit means for the UK and the broader global economy? Allow us to brief you on how the political leadership in the UK has managed to drop the ball.
Let’s start by rewinding time to the halcyon days of 2015. David Cameron, then leader of the Conservatives, is running for re-election in the UK federal election. After five years of a coalition government that responded to the Great Recession with austerity, pundits expected him to lose.
Instead, he bettered his vote share, leading the Tories to a majority in Parliament. What happened? The reasons vary, but growing anti-EU sentiment in the wake of the Global Financial Crisis led Cameron to promise a referendum on EU membership. In the last election in 2010, UKIP, an ultra-nationalist party, only garnered 3% of the vote. During the throes of the 2015 election, they polled at 13%.
Promising a people’s vote on whether to remain in the EU won Cameron the election. But it started a domino effect that has yet to reach its conclusion. True to his word, he scheduled a referendum for June 23, 2016.
The Leave campaign portrayed Britain at the mercy of an unaccountable bureaucracy. Playing fast and loose with the facts, they claimed the UK would get back £350 million a week from the EU. They would free British industry from the shackles of a “protectionist” legislative body. Worst of all, they played the race card, suggesting Turkey was about to be admitted to the EU. If true (it wasn’t), it would make it easier for Turks to immigrate to the UK.
It worked on an austerity-weary electorate – they opted to leave the EU by a vote of 52%-48%. The reaction from global financial markets was swift and brutal. GBP/EUR plunged 7%, while GBP/USD cratered by 10%. Market uncertainty since then has put a ceiling on the Pound Sterling. Prolonged negotiations and pushback from the left and the right have kept a lid on any recovery. Recently, a third failure of Brexit to pass Parliament kicked off a 6.5% dive in GBP/EUR in May 2019. In short, things are looking grim as time runs short.
Why did Theresa May throw in the towel?
And now, Theresa May, the architect of the only deal we’ve seen in the past two years, just resigned. While markets had already priced in her demise, don’t think traders and investors aren’t panicking. On the inside, they are freaking out.
But why did Theresa May bow out with so much at stake this year? Simply put – she lost the confidence of her caucus and inner circle. Early last month, Parliament held a third vote on Brexit. To court votes from Labour Brexiteers, she promised to hold a vote on a second referendum – if they supported the deal.
This compromise angered Leavers within her party – when the vote failed, her support base fell apart. As May 2019 progressed, party members called for her to resign. Then, Andrea Leadsom, a senior cabinet minister, quit her position in protest.
By late May, it was apparent – there was no way forward for Theresa after betraying her colleagues. On the 24th, she tendered her resignation, kicking off the Conservative leadership race.
What does this mean for Brexit?
What impact will the loss of Theresa May have on Brexit? Generally speaking, losing stable leadership months before a nation drives off an economic cliff is not a good thing.
To be more specific, though, this development means the UK terms of Brexit may change fundamentally. As of now, Boris Johnson, an ardent Leaver, is the odds-on favourite to succeed May – William Hill has him at 4/5 to win.
If he gets in, what direction will he take the UK? Renegotiating Brexit will have no effect – the EU took that option off the table after reaching the previous deal with May.
Many fear Boris will try to bluff the EU by advocating for a “no deal” Brexit, full bore. After all, he did advise Theresa to “go to the Pharaoh in Brussels [Donald Tusk]” and demand he “let my people go.” However, Parliament overwhelmingly rejected the nuclear option months ago. Proposing it to Parliament again would make it a confidence motion that would topple his government.
This impasse leaves only a pair of politically palatable options for Boris: either call a new election or a second Brexit referendum. Despite being an aggressive advocate of Brexit, he’s had a history of taking both sides of an issue. Just last month, he criticized May’s Brexit deal, but ultimately, he voted for it.
Boris Johnson is a politician, through and through. It has been his life’s ambition to be Prime Minister of the UK. Given his history of taking politically expedient positions, it’s unlikely he will commit political suicide after ascending to the highest office in the land.
In short, it is unlikely he will let the UK crash out of the EU without a deal. That said, expect market turbulence with every headline that comes out between now and the end of October.
What should I do if I have British investments?
While we do think a “no-deal” Brexit is unlikely, the resignation of May has increased its likelihood. As such, investors should hedge their bets if they have not already done so. If you have investments in the FTSE, though, things aren’t as bad as they seem. 70% of listed firms are international in scope, meaning they are impacted more by things like the Chinese-American trade spat. Nonetheless, the other 30%, comprised of banks, airlines, retailers, and home-builders. These stocks will tank if a Brexiteer like Boris Johnson becomes PM.
It is essential to have stores of non-GBP assets offshore to safeguard your finances. Despite gyrations in the GBP, it has mostly held stable since the Brexit vote. As such, there’s still time to protect yourself against the disastrous prospect of no-deal.
You have multiple means of transferring money overseas at your fingertips. Whether you have millions in assets to move, or just a few thousand, you can find a low-cost provider online. Don’t do this through the banks, though – they charge obscene fees and assess fat markups on exchange rates.
Online, fees are low, or they don’t exist. Further, providers often offer exchange rates close to interbank. Thanks to their low-cost business model, they can do this, all while still turning a profit.
What will a hard or ‘no deal’ Brexit mean for the UK property market?
What if, despite our prognostications, Boris attempts to scare the EU by doing nothing on Brexit? What if Donald Tusk doesn’t blink? What will it mean for the UK property market?
If the United Kingdom crashes out of the EU, drops in property value will likely be swift and harsh. Even optimistic outlooks, which call for a 1% drop in prices nationwide, forecasts a 10% plunge in Greater London. Meanwhile, the Bank of England says prices could crater by 35% in a worst-case scenario, no-deal Brexit.
Already, outlets like iNews have reported anecdotal evidence of drops in home equity. If you want to sell in this market, you’re taking a hair cut. And if no-deal becomes a reality, countless Britons may go underwater on their mortgages.
If you’re a foreign real estate investor, a no-deal or hard Brexit, as horrible as they would be, would offer the buying opportunity of a lifetime. The UK had a GDP of 2.8 trillion USD in 2018 – they will be fine in the long run.
Fasten your seat belts
Fear is at an all-time high in the UK. Nobody knows how Brexit will shake out in the months ahead. But as Warren Buffett once said, be greedy when others are fearful. Do protect yourself from UK exposure, but be on the lookout for once-in-a-lifetime buys, should things go sour.