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29 August 2019

Deal or No Deal?

The Operation Yellowhammer document proves a grave and sombre read. The document, which attempts to plan for a no-deal Brexit and was leaked last week, mentions trade disruption, border chaos, and data-sharing issues. Alongside the food, fuel and medicine shortages which are expected to rock the country in a doomsday-like scenario; that is, leaving the European Union without a deal. Michael Gove, the minister in charge of no-deal preparations, and the man who co-led the leave campaign in 2016, acknowledged that “there will be bumps in the road” if the UK leaves without a deal.

While agreeing with our Prime Minister, who labelled the conclusions from the report as a worst-case scenario, the likelihood of the UK leaving without a deal is an ever-growing prospect which must be taken seriously. ING, one of Europe’s largest banks, has placed a 25% probability on the chances of a no-deal Brexit; this is shadowed by Berenberg placing a 40% chance on a hard Brexit.  

Last month, the Government announced a £108m funding package to prepare companies for a no-deal Brexit. However, there were few finer details behind this headline, leaving many companies in a haze. The Government is also in the process of drawing up plans for a bailout fund to prop up businesses if necessary. While Mr Johnson described Brexit as a “massive economic opportunity”, and although this may be true in the long-term, the possible impact of crashing out of the EU remains alarming.

The mood in the House of Commons remains unchanged; most MPs do not want the UK to leave the EU without a deal. Moreover, the Labour leader, Jeremy Corbyn, has outlined plans to remove the current Government and replace it with a temporary administration that would delay Brexit. Additionally, Jo Swinson, leader of the Liberal Democrats, has openly declared her support for a second referendum; she also avowed, that if leave won again, she wouldn’t deliver on the result. However, given the expected Parliamentary suspension until early October, opposing MPs have limited time to stop a no-deal Brexit.

Irrespective of the political factors convoluting the Brexit process, the investor manual is simple; crashing out of the EU with no-deal will hit economic growth, possibly forcing the Bank of England into rate cuts, or even a renewed bond-buying programme. From an investors perspective, sticking to equities with a substantial overseas source of revenue would be prudent in a disorderly Brexit scenario. Yet, in such a case, the macroeconomic arena may well look bleak, at least in the short term; GDP growth is expected to slow, Sterling further depreciate, and inflation likely to increase.

Conversely, more domestically-exposed firms would be poised to benefit from a softer Brexit outcome. In these circumstances, the economy could witness growing business confidence, alongside a rise in household consumption, possibly propelling future GDP growth.

Despite the constant barrage of scaremongering, one would be forgiven for questioning the prospect of any Armageddon scenario. Unemployment is close to a 45-year low at 3.9%, consumer confidence has held up well, and with wage growth edging close to 4%, household incomes are continuing to rise.
Yet, with the October 31st deadline creeping ever-closer, and the chances of a re-arrangement with the EU looking as bleak as ever, the prospect of a no-deal Brexit seem ever more likely.

Please contact your usual Redmayne Bentley office if you wish to discuss this further.
Deal or No Deal?
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