Once the cloud of Brexit uncertainty has passed, the UK will begin forging new alliances that will support its long-term growth.
By all accounts, the Brexit process is not going at all well for the UK. As the outlook for the global economy has swung upwards since summer 2016 (the time of the UK’s referendum on European Union membership), UK GDP growth has trended lower – swimming against the tide. The marginalisation effect of Brexit uncertainty no doubt lies at the heart of this underperformance.
However, it is too easy to fall into depression about the UK’s prospects outside the EU. Global politics is a long game, and the uncertainty related to Brexit will eventually dissipate.
At just under $3 trillion, the UK economy may be dwarfed by the US ($20 trillion) and China ($14 trillion), but it still ranks as the world’s fifth-largest. And, politically, it is certainly able to punch above its weight. The UK is a permanent member of the UN Security Council, is home to one of the world’s largest international financial centres, boasts one of the top five global currencies, and has strong and extensive political and trade links to existing and former Commonwealth countries. For any nation seeking to recast its global role, that’s not a bad starting point.
World’s most competitive financial centres (2018)
New York 793
Hong Kong 781
San Francisco 726
Source: Global Financial Centres Index
The UK’s post-Brexit global strategy seems to revolve around the negotiation of bilateral market access agreements with its most significant trade partners; how that evolves depends hugely on its post-Brexit relationship with the EU.
The rise of populism presents a long-term threat to the euro and the very structure of the EU – which, in some sense, is itself still in its formative stages. The emergence of the populist Five Star and Northern League parties as dominant political players in Italy is only the most recent manifestation of this trend.
In the case of Brexit, EU politicians may react out of insecurity, seeking to make an example of countries that opt to exit the Union. If they succeed in isolating the UK, however, then the country will simply be incentivised to strengthen its political and economic ties with the world’s two superpowers: the US and China.
There is much talk of an extensive UK-US trade agreement, but this is at odds with the protectionist stance of President Trump. China’s shift in the opposite direction – towards embracing global trade – hints that the UK’s future outlook may depend less on its historical transatlantic “special relationship” than with new partnerships with the Far East.
Don Smith - Chief Investment Officer