Brexit: the journey and the destination

Brexit: the journey and the destination

07 OCTOBER 2020

The UK's exit from the European Union (EU) is happening in the context of COVID-19 and massive policy stimulus.  We explore what it means for markets over the immediate horizon and further out.

Political risk tends to have a particularly pronounced effect on markets when it’s about a single, cathartic moment that tightens financial conditions, triggers a credit crunch and, therefore, risks putting the economy in recession. Examples include the Greek referendum on cash for austerity years ago, as well as votes that formally or informally were about euro membership: the French elections of Macron versus Le Pen and the Italian elections when anti-euro parties featured prominently.

Brexit is different. It’s a process, not a single event – a series of potentially small negatives that, if summed up over a long timeframe, may perhaps turn into a bigger negative for the UK economy relative to a no-Brexit counterfactual. But, taken individually, the impact isn’t going to be that much. And these effects are based on no-policy-change assumptions (other than Brexit).

So, looking beyond a likely adjustment period, a negative impact is not necessarily a given. Although some near-term disruptions on export/import and currency flows is likely while uncertainty rises, over the longer term we’d expect the trade relationship between the UK and both the EU and the rest of the world to evolve. The structure of the domestic economy should adapt too, which includes London as a financial centre, with no competitor at the moment on the same scale within Europe’s time zone. So the overall impact over many years remains very much an open question.

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Daniele Antonucci

Chief Economist & Macro Strategist

James Purcell
Group Head of ESG, Sustainable and Impact Investing

Bill Street
Group Chief Investment Officer

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