Life after Brexit

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The only thing certain when it comes to Brexit, is continued uncertainty. Options on the table include a deal, which is unlikely but not impossible, a ‘no-deal’ and a second referendum. Whatever the outcome, the ramifications will be significant.

A no-deal (WTO) Brexit would be a disaster for the UK according to many in the markets and media. While it is possible that fears are overdone, leaving without a deal is likely to complicate things going forward compared to leaving with an agreement in place. One example would be the negotiation of a free trade agreement. As a ‘third country’ (post a WTO Brexit) the UK would need all 27 EU countries to separately ratify the deal. However, if a withdrawal deal were in place, negotiations would be conducted with the EU 27 as a bloc.

Despite the somewhat gloomy outlook, let’s remember that the UK will continue as a well-educated, advanced, service-driven economy with a flexible labor market. In education and medical services the UK’s customers are predominantly from India, China, the Middle East and Africa, while its competitors in education are the U.S., Australia and Canada. We can include accounting and insurance in this as well.

While the macroeconomic implications of Brexit on the UK are significant, the political impact could be even more profound and long lasting. One notable side-effect is that another referendum on Scottish independence will be more likely.

It could also have consequences for Northern Ireland, where opinion polls show a closing of the gap between those in favor of unification with the Republic of Ireland and in favor of remaining in the United Kingdom.

How would you vote in a Scottish independence referendum if held now?

Source: WhatScotlandthinks.org as at August 2019

Brexit has also increased the polarization of the right and left of British politics. Labour outperformed massively relative to expectations at the last election in May 2017. An even better performance in the next general election could see them with either a majority or, more likely, in some form of loose coalition with the Scottish Nationalists and the Liberal Democrats, both left of centre parties. Many of Labour’s policies are popular with large swathes of the population. These include rent controls, abolishing student debt and giving tenants the right to buy their home — even if landlords do not want to sell — at the purchase price that the landlord paid. They would also nationalize utilities, raise taxes on companies and high earners and attempt a radical shift in the British economy.

And behind all this, let’s not forget the economic fundamentals. Wage inflation has been accelerating in the UK, partly as a result of government policy. Public sector pay has been increasing and is now no longer a drag on overall wage growth. Unemployment is low, partially due to the fact that the UK no longer has the unlimited supply of labor from the EU — even before Brexit, migration to the UK from the EU 27 has fallen. These factors are all pushing up wage inflation.

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While the macroeconomic implications of Brexit on the UK are significant, the political impact could be even more profound and long lasting.

If the UK leaves the EU without a deal, the market expects the Bank of England to cut interest rates and ease monetary policy in other ways. We agree, but the current-account deficit remains very wide and wage inflation is picking up, limiting their room for maneuver.

Life will never be the same in the UK following the referendum but the longer-term outcome depends on a possible new government and the policies they pursue. Whatever happens, it represents a significant change for the UK.

UK wages accelerate

Source: Bloomberg as at 18 September 2019

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