No-deal Brexit: what will it cost?
The Square Mile is struggling to size up the risk – and impact – of a no-deal Brexit in March, says Angus McCrone.
The financial markets can give you a price on some wacky things. How about an estimate for 40,000lb of lean hogs for delivery in February 2019, or a punt on the probability that the National Bank of Greece will default on its bonds within five years, or on the future value of the Sao Tome and Principe dobra against the US dollar?
But the City is finding it harder to price accurately something that is now much more pressing for the UK economy and for UK business: the odds of a “no-deal” Brexit for the UK on 29 March 2019, and the impact, should that come to pass.
Of course, people have been making guesses at the first part: in early August, the betting site Betfair was advertising a price of two to one on (2/1) for a no-deal Brexit. UK Trade Secretary Liam Fox said he thought there was a 60% chance, and the Bank of England Governor Mark Carney warned the chances were “uncomfortably high”.
The markets have turned the sterling-dollar rate into a speculative mechanism to reflect the chances of Brexit being “hard” or “disorderly”, as opposed to “soft” or “non-existent”.
On 9 July, the first day of trading following the weekend “Chequers deal”, the pound got as high as $1.3363 when it looked like the agreement in Cabinet would stick, with no-one resigning other than David Davis. Sterling fell as low as $1.3190 when Boris Johnson quit and investors saw a chance of a leadership challenge.
Boom or bust?
Let’s say we can go one step better. Suppose we have taken a PhD in chaos theory, and so have worked out accurately the odds of the UK tumbling out of the EU next March without a deal agreed. What would that mean for business?
As with other scares foreseeable in advance, the effects might be phased. Ahead of the Millennium Bug moment at the turn of the century, there was significant stock-building by companies and households, helping the last two quarters of 1999 to record GDP growth of 1.8% and 1.4%, before it all calmed down to 0.8% in Q1 2000.
As with other scares foreseeable in advance, the effects [of a no-deal Brexit] might be phased
We could expect worries about hold-ups at the Channel, disruption to supply chains and the availability of everything from foodstuffs to machine parts to prompt many firms to buy early, just in case. Then, when the moment arrives and the UK crashes out of the EU, you could expect to see at best an unwinding of that stock-building, and at worst a major snarl-up at ports and airports and on the roads.
Carney said in August that a no-deal scenario would be “highly undesirable”, bringing “disruption to trade as we know it”, and as a consequence “disruption to the level of economic activity” and “higher prices”. He did not say it, but the higher prices could be the result not just of shortages but also of a weaker currency, as the social and political consequences of 29 March played out.
If a no-deal Brexit starts to look almost certain this winter, another likely trend would be more companies adjusting their structures, for example opening subsidiaries in the EU, shifting particular functions, or even re-domiciling. Financial firms and manufacturers would be the two sectors probably most likely to take this sort of action.
Some have already started.
Lloyds of London said in May this year that it had opened a subsidiary in Brussels, and hinted that it would move about 40 of its 600 staff there. Predictably, the Belgian minister of finance lapped up the move, saying: “By establishing an insurance company in Brussels, Lloyd’s will significantly strengthen Brussels as a financial centre… we are looking forward to welcoming more London-based insurance companies and brokers.”
Other firms would be likely to put capital investment plans on hold, until they see what eventuates after 29 March – at least, those that have not done so already. They might well decide to minimise staff journeys to and from the UK on and just after Brexit day, in case air travel is disrupted. Consumers might well do the same: taking holidays in February or earlier in March, and avoiding the week or two in question.
The crystal ball gets even murkier when we look out as far as April and May 2019.
But, putting to one side whatever political upheavals there might be, two potential positives for economic activity could be government throwing money at Customs and transport logistics in order to get trade flowing again – and a new round of takeovers, as overseas companies take advantage of weaker sterling to buy up British firms.