The Truth about Brexit - part 2 - what is likely to happen next, real impact and why a second vote on Brexit is likely

Future Trends, Economy, Markets, Keynote Speaker

Update 4th September 2017

Before and shortly after the Brexit vote I correctly predicted that the UK economy would NOT go into immediate meltdown as so many had falsely forecast.  A lot of people are still talking a lot of nonsense.

Here is the truth about the current situation and what is likely to happen next:

Over a year after the vote:

The UK economy has continued in good health with more people in jobs than ever in history, a larger workforce than ever before, very low unemployment (4.5%), very low inflation (2.6%), plus stable exports in goods and services.  There has been no apocalyptic economic disaster and the many who predicted one would happen within days or weeks, including the former UK Chancellor, turned out to be very unreliable guides.

Keep Brexit in proper context

Brexit is primarily about political conviction and vision rather than economics, and there is confusion about the economics, just as there is confusion about the politics and the vision.

To keep things in economic proportion, only 48% of all British exports go to the EU.  Less than that actually, as many products are just in transit through a big EU port like Rotterdam, on their way to buyers outside the EU, so the true figure is probably around 45%.

But all exports themselves are only a mere 12% of the UK economy.  Most of the economy is domestic: UK residents buying and selling amongst themselves, in a community of over 60 million people.  So the entire EU export total is a mere 5.4% of the UK economy. 

Even if exports to the EU were to fall long term by a dramatic 20%, and even if not a single one of those goods or services were sold instead in another nation, we would only be talking of a fall of around 1% of the entire economy.  In an economy that is growing by 1.5-2% in a year, that is not particularly significant compared to the impact of many global economic shocks we have seen in the past.

Yes of course the wider impact across the UK is hard to estimate, and could be double that 1.5-2%.  But we are hardly talking about the terminal decline of the UK.  Particularly as leaving the EU means that the UK can form many trade agreements with other non-EU nations, and follow policies that are far more business-friendly.

What will happen next?

Brexit is already becoming a relatively boring topic for many national leaders of EU nations, faced with much more urgent and pressing domestic issues.  They have delegated the process to a Brussels team, and will largely leave them to get on with it.  Britain has often been seen as an irritant and now has very few friends or favours it can call in. 

The feeling will strengthen that Britain just needs to get on with it and get out of the EU altogether, facing all the consequences of that, with damaged trade, lower economic growth, job losses, loss of political influence, and after having paid out compensation to honour previously made commitments.  At the same time, the EU will soon have to face up to very painful questions about cost savings and increases in payments to the EU budget, because the UK was such a major contributor.

The UK government will continue to propose all kinds of things in negotiations with the EU regarding the future, but discussions will continue to be tense, sometimes heated and slow. The EU team will continue to complain with some justification that the UK government seems unable to present a clear, confident set of proposals for what exactly it is seeking, in practical terms which are consistent with what the UK government already knows has a possibility of being agreed with the EU.

The truth is that the EU negotiating team has very little incentive whatever to work towards a quick deal or for a flexible approach, and everything to gain from a long drawn out process, which will mean more years of financial contribution by the UK to the EU, and maximum time for the EU to make budget adjustments. 

The EU team has everything to gain from showing to the rest of the EU what a terrible mistake the UK made; everything to gain from making life very, very difficult indeed for any nation that has the nerve to try to leave; everything to gain from making the process as humiliating and damaging as possible to the British.

However we can be almost certain of the following

1. Every nation in the EU will continue every year to trade with the UK, despite very effort by some in the EU machinery in Brussels to make it far more difficult to do so.  UK consumers will continue to buy EU products and EU consumers will continue to buy UK products – whether there are trade tarrifs or none.  Look at America or Japan or China or Brazil or South Africa.  Such countries trade perfectly well with the EU without needing to be part of the same single market. 

2. People will continue to move across borders – with large numbers coming to the UK to fill vacancies – despite all the political rhetoric.  It may take longer to recruit people from within the EU, longer for them to get permits and so on, but the flow will not stop because no government would dare to kill off its own business growth, when those businesses need to hire more people than are available in the UK.  No government in the last 30 years has actually enforced radical migration measures with any effectiveness.

3. Markets will assume the UK will suffer as a result of Brexit and the pound will continue to trade lower against the Euro than before Brexit, for some years, probably at a discount of at least 10%, which will be very useful to the UK and negative for the EU. The pound is currently 17% lower against the Euro than before the vote.

4. UK Footsie 100 share index will continue to trade higher than if Brexit was not happening.  This is because most large UK-listed companies earn so much cash in other currencies in other nations, and when the pound falls, the cash is worth more when brought back into UK bank accounts.

5. British goods will still be at least 5% cheaper to import into the EU than before Brexit, because of the big fall in the pound, even if the EU imposes full trade tarrifs.   This assumes the pound is worth 10% less than before Brexit against the Euro, and that trade tarrifs do not exceed 5%.  In most cases the tarrifs will be much less.  However UK companies will face many other complex barriers of various kinds which will waste time and cost money.

6.  EU imports into the UK will be at least 10% more expensive than before for the same reasons – low pound and UK imposing identical tariffs on EU imports.  However, rise in actual retail prices will be lower because we are talking about trade prices, before the end retailer and warehousing etc add their own markup.

7.  Unless common sense prevails, we will see major disruption of flow of fresh food across the UK / EU border which markets and farmers will take time to adjust to.

8.  It will be impossible to maintain a complete absence of border checks across the border from Republic of Ireland to Northern Ireland for either goods or services or people, without violating the fundamental nature of Brexit.  It would mean controls at some other points eg frontier between Northern Ireland and the UK or between Republic of Ireland and the rest of the EU.  Otherwise, an easy way to smuggle goods to and fro between the EU and the UK would be over that border, and the same for migrants wanting to slip across into England, Scotland or Wales via the Irish border. The challenge of Northern Ireland will be one of the most difficult to solve if the UK completely separates from the EU.  The fact that the UK and Republic of Ireland were both within the EU made it much easier to structure the peace process with all kinds of institutions and agreements running across the whole of the physical Island.  It could take five to ten years just to resolve the Northern Ireland issues relating to Brexit.

9.  Those who hate the idea of Brexit, in the UK or the EU, will continue to paint the worst possible picture of post-Brexit life, and continue to do all they can to block or slow down the entire process at every point, in the hope that the British government will be forced by changes in opinion polls to hold another EU referendum, which would cancel Brexit altogether.  But the nastier the behavior of some in the European Commission, the more likely it is that their actions will backfire, by just increasing anti-European feeling in the UK.

10.  Such continuous anti-Brexit activities will be risky to the UK because, if they fail to cancel Brexit, the end result is likely to be a chaotic and badly negotiated Brexit when it actually happens.

11.  Exports of goods and services from the UK to the EU will continue to fall even more rapidly than over the last 15 years, as emerging markets become even more important buyers from the UK than they are today. Even if we were to remain in the EU, I predict that the proportion of our exports to the EU would fall from 45% in 2017  (allowing for the 3% of goods sent to other nations via the EU), by a further 1% a year over the next 15 years to only 30% by 2032. Leaving the EU will mean we will be likely to achieve such a transition in 50-60% of the time – maybe by 2027-2030.

12.  Avoiding a chaotic, sudden departure from the EU without a proper transition period will be difficult and require intensive efforts on both sides:

- Personal involvement of the Prime Minister to cut through things rapidly

- Rapid agreement by the UK to meet a wide range of obligations - for at least EU 60bn and possibly more than EU70bn, assuming that the UK remains effectively in the EU regarding free movement of goods and people etc for a period beyond the actual Brexit date

- Unity across parties in UK Parliament, acting in the national interest

- Willingness of European and UK teams to increase time in negotiations from a day a week to at least 3 days a week

13.  Sudden departure from the EU, relying only on World Trade Organisation rules, will risk a period of chaos unless there is some flexibility by the EU because the WTO process requires its own approvals which could take years.

14.  It is likely to take at least 3-5 years beyond the date of Brexit to negotiate a comprehensive trade deal, as no existing trade deal can be used as a model in this unique relationship.  During that time, the UK may enter a half-way house, paying into EU budgets, accepting free movement of people, with no trade barriers, subject to EU rulings but not represented in any way in EU Parliament or in the EU Commission.  Such a half-way position could last for many years, especially if the British people change their mind about the advantages of being completely out.

15.  Despite all the problems, we can expect various interim fudges and compromises, one by one, sector by sector, which will allow each minor crisis to be resolved a step at a time – for example regarding some of the most commonly exported fresh foods, or air travel, or visa applications, or border controls for Northern Ireland.

16.  Money that would otherwise have been spent propping up the EU will be spent by the UK government on other things such as better health care or schools.  The same applies to significant new revenues that will come from taxing all EU imports into the UK.    These funds can also be used to stimulate investment, encourage entrepreneurs, lower corporation tax, and to boost industrial research.

17.  Expect the British people to have opportunity to vote again on Brexit, before the final deal is implemented, and the vote to once again be fairly close.  Such a vote may be as part of a general election if one party promotes a clear “Cancel Brexit” commitment.   The challenge is that at that point, relationships with the EU may be so poisoned that a return to the EU may become an unthinkable nightmare to a significant number of EU leaders, worried that a few years into the future, history will repeat itself with yet another call for the UK to leave.

18.  Even if the UK does completely leave the EU, the UK is likely to continue to collaborate with a wide variety of EU forums, paying many billions each year to participate in them, ranging from policing to anti-terrorism, patents approvals, scientific standards and drug licensing.

19.  In all of this, the key is clear leadership and unity on these matters in the UK.   The last election result has severely weakened the ability of any leader to agree any way forward about any variation of Brexit, and was a massive own-goal in the EU / UK negotiations.  Even more extraordinary is that the party (just about still) in government, is led by a Prime Minister whose instinct all along has been that the UK should remain in the EU.  Yet that same person is now being asked to lead the country out.  This is a major difficulty for EU negotiators who have every reason to worry that the people in the room they are talking to have no real power to deliver on their side of any agreement.

20.  The wider frame in which all this is happening is that belief in politics is likely to continue to weaken across the EU, following a long term global pattern.  Most people in the UK distrust all politicians.  And the rising impact of social media means that it is even more difficult to govern than before, with every policy dissected seconds after yet another leak of confidential discussion papers. 

 

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