How the Brexit Outcome Will Affect Global Markets

How the Brexit Outcome Will Affect Global Markets

The decision by the Britons to leave the EU during the June 2016 referendum came as a shock to the world of financial experts and leaders alike.

Fast forward three years, and the Brexit is still a hot topic among financial pundits and policymakers.

The UK’s divorce deal with the EU has gone through a lot of deja vu moments. And the drama is still going on. 

Downing Street has voted recently that the negotiations should be re-opened. This has created a lot of obstacles for the British PM Thresa May in ensuring a soft Brexit landing.

Experts predict that there will be a negative effect of Brexit on the global market. That’s why it’s critical that investors and financial experts fully understand the impact of the outcome of the ongoing Brexit trade negotiations. 

Present Relationship between Britain and the EU

Currently, the trade between the EU and Britain is seamless. There are no tariffs and border checks. A firm in Manchester can order goods from suppliers in Munich as easily as they do from London.

The seamless trade allows manufacturers to become part of the pan-European web of just-in-time supply chains.

Food industry particularly benefits from the seamless movement of goods. Retail industries benefit immensely with just-in-time deliveries since there is no need for storing and refrigerating goods at the ports. This translates into a lower price of goods in the market.

Moreover, automotive manufacturers in respective countries benefit from free supply of finished products and parts.

However, this will all change when the UK breaks away from the EU.

There is an urgent need for policymakers on both sides of the English Channel to hammer out an agreement for a soft Brexit landing.

A no-deal will be extremely hard for manufacturers and retailers on both Britain and the EU.

The Impact of a No-Brexit Deal on the UK Economy

Financial experts predict that a no-deal would pose a serious risk to the global financial markets.

The disruptions in the cross-border trade could undermine the confidence of the manufacturer and retail sector in both Britain and the EU. This will have a devastating impact on the economy and financial sector in the respective countries.

In case of a no-deal, goods entering the customs will have to go through checks. There are 405 checks in total for products entering the EU from abroad. These checks will be applied to UK goods that enter the EU when Britain leaves the EU without any deal.

The administrative costs will increase significantly and result in a lot of delays at the borders. This will have a negative impact on the manufacturing and retail sector.

Food and beverages prices could increase as much as 29 percent in the UK while the prices of non-goods such as clothing will increase by about 7 percent.

The service sector will also reel when the UK formally leaves the EU without a deal. British financial companies will lose the ‘passporting rights’ to sell their services to residents in the UK. The clearing and settlements of financial products especially derivatives like swaps, options, and futures will be delayed.

According to the Bank of England, a no-deal Brexit will affect the £29 trillion (about $38 trillion) derivatives contracts and 90 percent of currency swaps.

Increase in the price of goods could result in a slowdown in consumer spending. This will create a drag on the economies in the UK and the EU.

Pricier imported goods would also hit the profitability of businesses that depend on raw material and product imports. This could ultimately have a negative impact on the stock market.

Moreover, the UK airlines would likely no longer be part of the ‘single European Sky’. British airlines such as Easy Jet and others that fly to routes between the UK and European cities will be particularly hit.

The Impact of a No-Brexit Deal on the Rest of the World

EU countries will be affected by the Brexit.

Germany that had faced the risk of a recession in 2018 will be particularly vulnerable to the no-deal Brexit.

Data shows that Germany’s export to the UK amounted to $96.8 billion last year. German car sales were $22.5 billion during the year. 

A no-deal will mean that the UK will have the status of a third country as per the WTO rules. This will likely result in an increase in tariffs by about 10 percent for German cars. The tariff increase will be up to 22 percent for larger vehicles like pick-ups and trucks.

The custom checks at the ports will also disrupt the deliveries. This will result in reduced demand of German cars and also a threat of job cuts.

Automakers in the US would also suffer from a disorderly exit of the UK from EU membership.

Ford Motors have calculated that it would result in a loss of up to $1 billion for the company. 

Due to the grave consequences of Britain leaving the EU without a deal, the IMF has warned that it would have a negative impact on global economic growth. The economic growth will falter and remain a source of pessimism among investors.

The latest report by the World Bank has stated that a no-deal exit is a risk to not just the EU and the UK countries but also to other regions that rely heavily on trade with them. This includes countries in Eastern Europe such as Moldova and also as far as those in North Africa will be affected.

The bank has forecasted that a no-deal Brexit will result in a decrease in global economic growth of about 2.9 percent in 2019. Also, the growth will drop by 0.1 further in 2020.

Future Outlook about Affect of Brexit on the Global Economy

The UK and the EU need to agree on a win-win deal. A disorderly exist will have the potential to create chaos not just in Western Europe but also in the global economy.

While the negative effects are likely to be short term, the adjustment process will create significant losses.

A no-deal scenario would result in significant hardships for companies that benefit from the free flow of goods between the UK and the EU.

Being the fifth largest economy in the world, any negative effect on the economy of the UK will have worldwide repercussions.

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