Following the Brexit vote in June, there have been lots of discussions about Britain’s post-EU arrangements, which can be loosely categorized as “hard” or “soft” options.
Generally speaking, a hard Brexit arrangement would likely see the UK give up full access to the single market while retaining full control over its borders.
Under this scenario, UK goods would face duties in the EU market and British banks will likely have to apply for license to operate in EU nations.
In contrast, a soft Brexit would leave the UK’s relationship with the EU as close as possible to the existing arrangements. Citizens of UK and other EU states would continue to work and travel freely, but UK has to give up its border control. That’s similar to the situation of Norway.
So far, the UK government has no intention to particularly protect its financial services sector when negotiating with EU members, according to reports.
Prime Minister Theresa May said there is no trade-off between controlling immigration and trading with Europe, implying she is veering towards a ‘hard Brexit’.
No EU nation has ever triggered Article 50 of the Lisbon treaty before, Hence, no politician or economist can gauge the negotiation results related to Britain as of now. The uncertainty is set to drag on for next two to three years.
This could mean that the pound sterling will stay under pressure.
Also, corporates may reduce or delay their investment plans. Some may even decide to withdraw from the UK market.
A recent survey from the Bank of England shows that investment interest in UK’s manufacturing and service sectors dropped in September to the weakest level since late 2009. Real investment expenditure also contracted for two straight quarters.
Meanwhile, sustained depreciation of the currency may push up inflation.
Economists and analysts have revised down UK’s economic growth rate by 35 to 165 basis points since the referendum.
To counter the potential dampening impact from Brexit, the Bank of England cut base rate by 25 basis points in August, the first rate cut since early 2009. The central bank also unveiled plans to buy 60 billion pounds of government bonds and 10 billion pounds of corporate bonds, and launched a big financing scheme to support banks.
But so far, the UK economy has been doing far better than what many observers had feared, indicating that the damage from the Brexit vote has been limited.
This article appeared in the Hong Kong Economic Journal on Oct. 5
Translation by Julie Zhu
[Chinese version 中文版]
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