31st October – the final deadline in the Brexit saga – is getting closer each day. With every day that passes, the possibility of a no deal Brexit may be increasing.
But is a no-deal Brexit really likely? What will it mean to the economy if it does happen – and how would it affect your finances?
At Continuum we have been keeping a very close eye on Brexit, because we believe it is important to prepare for all the possible outcomes.
What exactly is a no-deal Brexit ?
The single market means a customs union, which supports trade between EU members by eliminating tariffs, which are simply taxes on imports.
Under Theresa May’s rejected deal, the UK would have entered a transition period for up to two years from 31st October. This would have provided breathing space, while the two sides tried to negotiate. In practice, this might have meant business as usual and remaining in the customs union.
In a no-deal scenario, the UK would leave the European Union at the stroke of midnight on the 31st. Trade would be on terms set by the World Trade Organisation.
If this happens, tariffs will apply to most goods exported to the EU, making UK goods less competitive. It would also mean border checks for goods, potential bottlenecks at ports such as Dover and the risk of running out of key items such as perishable medicines. No deal would also mean the UK service industry would lose guaranteed access to the EU single market, affecting the key activities of the City of London such as banking, insurance and finance.
What would the impact be?
Crashing out of the EU in a no-deal could be a major problem for the UK economy.
A no-deal Brexit is “fraught with risks” said Philip Rycroft, former permanent secretary at the Brexit department in charge of Brexit planning.
Manufacturing might readjust, finding new global export markets. However, in the financial sector, relocations have already begun and the shift in staff, business, assets and legal entities may continue to chip away at the UK’s influence in the banking and finance industry. It could significantly reduce the UK’s £26bn trade surplus in financial services with the EU.
But the biggest impact may not be on the UK, but on the EU.
Under WTO rules, after Brexit, cars would be taxed at 10% when they crossed the UK-EU border. Agricultural tariffs would be significantly higher, rising to an average of more than 35% for dairy products.
The no-deal would cut both ways. A 10% tariff on exports to the UK is something the German motor industry would like to avoid, and most other EU businesses would be similarly wary of being priced out of a key export market.
A no-deal Brexit could still happen if a deal cannot be agreed, but it may be in no-one’s interest.
How likely is a no-deal Brexit?
A no-deal is certainly a possibility. Frontrunner in the Conservative leadership race Boris Johnson (now Prime Minister) has said the UK should prepare for it – he has promised to leave with or without a deal on 31st October. But he has also said he will try to get a new deal agreed, because it is in the economic interest of both the EU and the UK to do so. His hardline approach may simply be a negotiating ploy to provide leverage.
In any case, there may be enough MPs on both sides of the house opposed to a no-deal Brexit who would block it.
What will it all cost you?
A hard Brexit, if it does happen, may not be a financial disaster for UK investors – especially if they call on us at Continuum to make use of our investment expertise.
U.K. equities might be little moved by a no deal as markets may have already priced it in, and there could be some new opportunities for active investors – warehousing is one sector often cited. European stocks could suffer more with the loss of a key market.
But for most people, one answer can be to diversify, with consideration given to holding a mix of defensive and growth assets to suit their risk appetite.
At Continuum, we have looked at the scenarios, and we would be happy to share our findings with you. We can help you build a diversified investment portfolio designed in line with your attitude to risk and overall financial objectives – whatever form Brexit ultimately takes.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.