After Philip Hammond recently released his letter about the potential economic damage of a no-deal Brexit, Theresa May stuck to her line that no-deal is better than a bad deal. Citing the head of the World Trade Organisation, she said that leaving Brussels empty-handed would not be terminal: “He said that it would not be a walk in the park, but it wouldn’t be the end of the world.” After all, economic Armageddon was predicted to hit the moment that Britain voted to leave, but two years after the vote it is still nowhere to be seen.
Currently, the UK has the lowest level of unemployment since early 1975. Unemployment in the crisis-torn eurozone has fallen to its lowest level since the financial crisis – though it remains more than twice as high as Britain’s. This fact alone should put the entire Brexit issue in perspective when one considers how the EU celebrates reducing unemployment to 8 per cent, while the British media hammer May’s government even though the British economic record is extremely strong.
But could Britain go from rosy skies to disaster after a potential no-deal scenario in March 2019? It is, in my view, unlikely. There could be frictional and short-term issues that may result in a 0.1-0.2 per cent hit in GDP for the first year. Once these issues get ironed out, our economic growth should continue.
If a crisis were to hit the British economy, it would stem from cyclical characteristics – the business or debt cycle. Interest rates are low, most consumption is driven by debt, and the savings rate isn’t picking up. If wages don’t begin to rise alongside interest rates, a crisis or slowdown could very well materialise. However, this will not be related to Brexit; the US, Europe and Asia will all experience this type of slowdown, not just Britain.
Indeed, so far, the proposed “Brexit banking exodus” looks like a front-page sensationalist headline and nothing more. The biggest indicator that London will remain the financial capital of Europe is that Goldman Sachs recently secured a 25-year lease on it’s London headquarters. If the bank reflected that famous Lloyd Blankfein tweet in which he mentioned spending a lot more time in Frankfurt, then I doubt the Goldman hierarchy would have authorised the signing of such a lease. We’ve also seen other firms blame Brexit for moves that were discussed before this no-deal scenario even materialised. Unilever moved its headquarters to the Netherlands, but it also must be noted that the Netherlands have stricter corporate takeover rules and Unilever has been the target of a takeover by Kraft-Heinz. Are they just playing it safe and blaming Brexit through convenience?
Britain has the most business-friendly structures out of all of Europe – and will likely continue to do so. Whether a business can afford to handle the labour laws in France or the work culture in southern Europe compared to a Brexit Britain is a question that many have not yet asked. While Emmanuel Macron may or may not change those labour laws, Britain will always be the go-to jurisdiction for international businesses. It’s tax regime, the judicial system and anglophone way of life will not change as a result of Brexit, and these play a major role in attracting newcomers.
Complementing this is the ability to do free trade deals with other countries. Could Britain take advantage of trade deals with the US, India, Japan and China? It’s almost a rhetorical question. As an industrious nation, its obvious trade links with emerging markets or the US would benefit and accelerate the UK economy. Some aspects of being tied to EU rules limit the space British politicians would have to negotiate trade agreements with third-party countries. A no-deal scenario could facilitate negotiators by having no such restrictions.
While a no-deal Brexit would be more difficult than signing a free trade agreement, it wouldn’t be the end of the world. And it’s important to remember that a short-term sacrifice resulting in long-term gain is something that the British public seem to have voted for. This is why even when a short-term stint of lacklustre growth does hit – as frictional and transitional issues are dealt with – the media and Remainers cannot jump on it and scream “Brexit has failed”. The outcome of Brexit cannot be determined until perhaps 10 or 20 years from now – and from a realistic standpoint, it will all work out, even if we leave without a deal.