Economics & Markets

The UK has left the EU: what’s next for markets?

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

After a rollercoaster few years – marred by delays, parliamentary stand-offs and a revolving door of prime ministers - the UK left the EU on January 31.

The Brexit negotiations have been one for the ages. It has been an eventful few years for the UK between the initial referendum, the resignation of prime minister David Cameron, then Theresa May, and the eventual election of Boris Johnson.

Over time, the events which have become most significant to markets are those related to trade talks between the EU and the UK after Brexit. That still stands - the flow of goods and services is critical to the economy.

To give you an idea of the gravity of trade talks: currently, around 50% of the UK’s imports are from the EU. If costs on these imported goods were to rise, the British economy would slow and financial markets would take a hit as consumers and businesses rein in spending.

Further, at a time that the notion of a ‘hard’ Brexit was on the cards, The Bank of England warned that outcome could shrink the UK economy by 5.5% in a year, as well as impacting British and European stock markets and the UK currency. The International Monetary Fund also warned a hard Brexit could trigger a slowdown in global growth.

Right now, we are in the so-called ‘transition period,’ which effectively means the two parties have a period of time to work out the terms of their trade agreement. This time will also be used to work out if and how the current freedom of movement agreement is negotiated.

In good news for markets, so far, it doesn’t appear the UK parliament wants any remnants of a ‘hard’ Brexit. Rather, a ‘soft’ Brexit, which means trade between the UK and the EU will continue, is what parliament appears to be leaning towards.

Nevertheless, we don’t know the terms of trade at this point, and it’s one for market watchers to keep an eye on in 2020.

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Diana Mousina, Senior Economist
  • Economics & Markets
  • Politics
  • SMSF News
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