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Implications of the UK’s Referendum Vote to leave the European Union

Updated: 14/07/2016

Politics

Political risks in the UK have receded considerably since the immediate aftermath of the UK’s Referendum vote to leave the EU. Theresa May being appointed Prime Minister is a significant development in this regard and she has already ruled out a General Election this year. A sense of greater political calm has also followed from the much reduced likelihood of another Scottish Referendum vote.     

In terms of the European Union, a tough stance towards the UK may be envisaged, to deter other countries leaving. In addition, several countries are approaching general elections, where voter’s discontent with the establishment is probable. France and Germany hold their national elections in 2017.

The process of negotiating the UK’s departure from the European Union will undoubtedly be protracted and will take a minimum of two years from the time when Article 50 is invoked. This decision appears to have been deferred until the end of this year. Access to the European free trade area will clearly be desirable. If that proved impossible, goods exports would be subject to tariffs of 3.3% on a weighted average basis, which given the weakness of sterling should not prove too onerous. However, beyond the first two years there are threats from non-tariff costs: This may include costly burdens of proof for complying with regulations and customs legislation, which could be onerous, especially for the financial services sector.   

Economics

Most economists agree that there are likely to be risks of lower economic growth in the UK and in Europe. Consumer confidence may weaken, with cash flow for consumers marginally lower due to higher fuel prices. Business confidence may also suffer in the short term while business investment decisions could be delayed or postponed. The scale of any economic slowdown is likely to be partly mitigated by sterling weakness, which should encourage UK exports and boost tourism prospects. Overall, a reduction in GDP over two years could be relatively modest at 1-2% according to some asset managers. While fears of recession were discussed during the campaigning, it does not currently feature widely, but clearly risks of such an eventuality have risen.   

The Bank of England has developed detailed contingency plans and markets since the result announcement appear to be functioning in an orderly manner. It is thought its priority is to maintain market liquidity. Their second consideration is financial stability and in this context interest rate reductions from the present 0.5% is seen as quite likely over the coming months.  Quantitative Easing is the Bank of England’s third priority and here action is only anticipated if a further improvement in financial stability is needed.

Against the uncertainties facing the UK and European economies, the probability of a rate increase from the US Federal Reserve this year has diminished.

 

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

 

 

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