November 6, 2016    3 minute read

Brexit: What Leaving The EU Means For The UK

The Dissolution Of Unions    November 6, 2016    3 minute read

Brexit: What Leaving The EU Means For The UK

A British court dealt a severe blow to Prime Minister Theresa May’s plans to begin the process of leaving the European Union early next year, ruling that she must get Parliament’s approval before she acts. The decision greatly complicates May’s plans to trigger Article 50 by the end of March 2017 at the latest.

The Way Forward

There are two fundamental paths: Hard Brexit or Soft Brexit. In a Hard Brexit scenario, the UK will have many transaction costs, with debt renegotiated at a high rate. Furthermore, a Hard Brexit means that the UK will be excluded from the single market and end the freedom of movement of people. This is estimated to cost some £140bn (almost 7% of the UK GDP) and will be spread over multiple years of stagflation in the country. Since June 23rd, Britons have lost £700bn worth of purchasing power (about £10.000 per person). In this instance, the court decision is a good sign.

The Pound Falls On Brexit Concerns

The pound is at a 168-years low, which means higher costs, particularly from imports. Britain’s trade balance is strongly import oriented. The pound is set to reach the parity with the euro, next year. This is only positive for incoming tourism. The pound, currently, is the world’s worst-performing currency.gbp

The Domestic Economy

Production will slow down, many jobs will be lost, and a lot of companies will relocate out of the UK. According to Bloomberg, before next year, the big banks and insurance companies will move to other EU financial destinations, such as Frankfurt, Paris, Luxembourg.
The domestic stocks index (MSCI ACWI world equity index) underperformed above the 28%, MSCI UK underperforms the world MSCI (about 10%).

What About Inflation?

The five-year predicted inflation rate is not hopeful.inf

The Bond Market

The UK’s bond market collapsed after being downgraded by S&P and Moody’s, and the policy decisions of the Bank Of England (BoE). The recent sell-off in bond markets has received significant coverage in the last few days, with a particular focus on the decline in the price of UK gilts, prompting some speculation that some overseas investors are losing confidence in the UK government debt.

Real Estate

Before Brexit, there was a “big bubble” in the real estate market, especially within the luxury homes sector in London. Prices, mostly in June, were at their highest level. Property prices will fall 5.6% in London in 2017 over Brexit uncertainty, economists say.ll

The latest UK GDP report (for Q3) beat expectations, showing a 0.5% growth rate, but it was achieved through the services sector, including banks, insurance companies, etc., that still have the EU financial passport. The UK is the biggest European financial hub, but this status will depend on the outcome of the negotiations surrounding the banks’ passport.
Considering the bond market and seemingly infinite Quantitative Easing (QE) in the eurozone, it is fairer to have a slower inflation growth. More inflation, with the current bond and stock prices, can spoil the market, and see a bond drop (considering the ZIRP and NIRP policies).

Brexit has already changed Britain, citizens voted on things they did not fully understand, and now Scotland is calling for independence. There is no coherence in Brexit.
Certainly, for commodities this is a good moment. Gold has returned to the 1.300 mark, and silver has gained too, fuelled by the global populist revolution (Brexit, the US’s Donald Trump, Italy’s Movimento 5 Stelle and Lega Nord, anti-euro anti-immigrates movements, France’s Marine Le Pen and the French Front national movement). One thing is for sure: the EU can live without the UK, but can the UK live without the EU?

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