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Economics & Markets

Brexit update: the fight continues

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

The Brexit deadline of October 31 is rapidly approaching, and both sides of UK Parliament are manoeuvring to try and achieve what they think will be the best outcome. No matter what, there are significant economic ramifications to consider.

The UK’s new prime minister, Boris Johnson, had been pushing ahead to achieve Brexit even if this resulted in a “no-deal” which would see the UK leave the EU without a free trade deal in place, by manipulating an early shut down of the Parliament.

In response, we’ve seen Conservative MPs who are against a no-deal Brexit cross the floor to vote with the Labour opposition, requiring Mr Johnson to seek an extension from the EU if a deal is not reached before the deadline.

Parliament has also moved to head off an early election.

UK economy at risk

A no-deal Brexit, should it occur, would come as a huge shock to the UK economy.

This is because around 45 per cent of UK exports go to the EU. These would suddenly be subject to higher tariffs, taxes and barriers to entry.

Likewise, there’s a lot of uncertainty about what it would mean for the financial sector in London. The sector may not have the access to the rest of Europe that it currently enjoys, so a no-deal Brexit would be a bit of a shock to the economy.

There’s always a chance the EU will agree a slightly better deal, however, that’s hard unclear at this stage.

Impact on the EU

While a no-deal Brexit would be a big negative for the UK, putting it in context globally, the real reason to worry about Brexit is if it causes significant economic problems for the far bigger Eurozone.

However, I don’t think that will happen. A no-deal Brexit will be a bit of a blow to confidence, but only around five per cent of EU exports go to the UK, so Brexit is not anywhere near as big a deal for the EU as it is for the UK.

The other risk is that Brexit could trigger a domino effect of other countries wanting to leave the Eurozone. However, we’ve seen over the past three years since the initial Brexit referendum that they don’t want to do that. In fact, the Euro remains pretty popular - even in Italy, so a collapse in the Euro is unlikely.

Conclusion

Brexit remains a risk to the UK economy, and a no-deal Brexit would mean a much lower British Pound. However, by the same token, that might provide a bit of a lift to the UK share market. This was what we saw following the initial referendum three years ago.

Hopefully it doesn’t come to that, hopefully there’s some sort of free trade deal struck or a positive resolution negotiated. I think there’s still quite a lot of water to go under the bridge before we get to that point.

Either way just bear in mind that the significance of Brexit to the Eurozone, and hence the global economy, is often overstated.

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Dr Shane Oliver, Head of Investment Strategy & Chief Economist
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

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