“Do or die” - is Brexit set to conclude with no deal on 31 October?Contributor Karen Ward
The UK may not be headed for no deal, but seems highly likely to be moving towards a general election.
While no deal is not the most likely scenario in our view, the risks are rising. The UK outlook is binary. A Brexit deal could see sterling bounce to 1.40 against the dollar, but no deal on 31 October could see a further slump to 1.10.
In this article we consider the following questions:
- What is no deal, and what might it mean for the UK economy and markets?
- What are the risks to markets in the event of a general election?
- Is all hope of a deal dead?
What is no deal, and what might it mean for the UK economy and markets?
The EU is a club of countries, members of which can trade with minimal barriers, since all countries apply common regulatory and product standards. Goods entering the EU from outside the club face a common tariff rate. The EU also strikes trade deals with other countries or blocs on behalf of all its members. There are 40 such agreements, covering around 90 countries.
If the UK leaves the EU, it still sits in a broader club of 164 countries called the World Trade Organisation (WTO). The terms of trade under the WTO are much less comprehensive and so reverting to WTO terms would mean:
- UK exports to the EU would face tariffs, and vice versa. The WTO prevents discrimination between members, so the tariff on each product must be offered to all WTO members (known as the most-favoured-nation rate). This equates to a weighted average rate of roughly 3.2% applied to UK exports to the EU.
- Customs checks would be required at all border points, including those between Northern Ireland and the Republic of Ireland.
- Neither side would recognise product standards, so regulatory checks would be required for new and existing product lines.
- The UK financial services sector would lose its passporting rights (its right to service EU clients from any EU country). Broadcasting and transport services rights would also be lost.
- The UK would need to replicate the trade agreements that have been negotiated on its behalf by the EU (the UK has made arrangements to roll over 12 of the 40 so far), but would have the autonomous capacity to negotiate new trade deals independently.
While this would be the default position on 1 November if the UK leaves without a deal, in reality there are likely to be a number of emergency arrangements to ease the process of transition, even if the negotiations ended in a particularly hostile fashion. Either side could, for example, choose to grandfather certain arrangements for a set period of time to create a period of transition for firms to adjust.
The extent to which any such arrangements are put in place is just one element of the uncertainty involved in forecasting such an unprecedented event. In our view, the most detailed and rigorous attempt to analyse the short-run impact of leaving without a deal is that produced by the Bank of England (BoE) on request of the Treasury Select Committee. Taken from this report,1 the table below details the economic and sterling impact of a ‘disorderly’ no-deal scenario, versus a ‘disruptive’ no-deal scenario in which provisions are made by both sides to ease the transition.
Exhibit 1: Bank of England modelling of no-deal Brexit scenarios
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