What Impact will Brexit Have on Economic Conditions?

It has been pretty much impossible to avoid the ongoing Brexit saga over the last couple of years, but this most turbulent and contentious of issues may finally be drawing to a close. Or not, as the cay may be! Prime Minister Theresa May has yet to negotiate exit conditions that will satisfy parliament, but what will the economic consequences of Brexit be for Britain?

This is certainly a tricky question to answer, but in this post we will examine a few key areas that will be impacted by the mooted UK exit from the European Union.

Brexit Lending

Lending and borrowing money is always critical for any modern economy, and particularly vital in Britain due to the onus placed on the housing market. And it probably won't come as a huge surprise to many readers that Brexit could put pressure on the lending market.

A paper published by the Loan Market Association - which represents 700 participants in the lending market - entitled 'Turning Off the Liquidity Tap' examines the consequences of a no deal Brexit on the European loan market. The document concludes that the lack of a trade deal will see existing loans made across European borders being detrimentally impacted. These deals would either need to be restructured, or repaid early.

However, the Financial Times noted that mortgage lending has hitherto been unaffected by the Brexit uncertainty. Quoting the trade association UK Finance, the FT noted that residential lending exceeded £25 billion in October, which is 5.6% more than for the same month last year. This suggests that the credit market hasn't become too depressed as of yet, and it may remain robust in most Brexit scenarios.

Brexit Interest Rates

Interest rates are obviously of central importance to us, so the impact of Brexit on this critical aspect of the economy is a key issue. It should firstly be stated that the long-term prognosis for interest rates is for them to be raised. The last few years have seen an unprecedented period of low interest rates, and although the Bank of England has displayed caution, this will not continue indefinitely.

Aside from this, savers may be particularly hoping for a rapid British exit from the European Union. Comments from Bank of England governor Mark Carney suggest that a smooth Brexit could hasten rates rises. Of course, since then it has become clear that a smooth Brexit is far from forthcoming, so the prognosis for interest rates might not be particularly great. Interest rates will probably go up eventually, but it seems that Brexit could delay this inevitability.

Brexit Trade

Trade has been a particular focus of Brexit negotiations, with most economic commentators deeming it to be a critical aspect of the issue. Indeed, at the time of writing the UK has yet to finalise agreements to replace existing free trade deals the EU has with 40 big economies if there is a no-deal Brexit.

However, while the consensus of opinion is certainly that Brexit will have an impact on trade, and many consider this impact to be negative, the downcast sentiment in this area is perhaps a little misguided. While UK's exit from the European Union would complicate trade arrangements, the reality is that every single nation in Europe will want to continue trading with the world's fifth largest economy, and the second largest in Europe. Similarly, Britain remains a massive exporter of products, and consumers from the European mainland will still want these products, regardless of Brexit.

There is some uncertainty in this area, but the reality is probably nowhere near as bad as has been suggested in some quarters.

Brexit Jobs

Another key area of the economy for many British people is employment, and Brexit is expected to have a significant impact on job, particularly in the healthcare sector.

Brexit will almost certainly limit, and possibly seriously impede, the ability of the NHS to recruit and retain the EU employees. This would be arguably the biggest overall impact on the NHS, considering the massive reliance of the publicly-funded healthcare system on EU labour. There are around 144,000 EU health and social care professionals currently working in England, equivalent to 10% of our doctors and 5% of our nurses. Some 80,000 work in adult social care, 58,000 work for the NHS and 6,000 work for independent health organisations.

The NHS is thus likely to experience significant difficulties in a post-Brexit climate, and this will be a microcosm of the UK job market as a whole. Conversely, this will open up opportunities for UK residents, and Clare Marx, former President of the Royal College of Surgeons, has been positive about the potential that Brexit will offer to raise standards.

Overall, this is a difficult area to assess. There may be some short-term economic pain related to employment after Brexit, as services are forced to cope with former EU staff leaving. But this may be counter-balanced by positive factors such as reduced unemployment in the longer term.

Brexit Economy

The biggest area of debate with regard to Brexit has probably been on the overall impact on the economy. Most of the authoritative sources on this subject have been negative, and an official government report has recently indicated that there will be some negative short-term economic impact. And the value of sterling has, of course, declined, although many commenters have failed to point out that it has fallen much more against major currencies in recent years.

Certainly, Brexit will have numerous economic impacts, and the consensus of opinion is that most of them will be negative. This may indeed ultimately be correct, but there are certainly counter-arguments against this notion as well. What should be said is that there will now be a period in British history – assuming Brexit happens relatively swiftly – during which anything and everything will be associated with Brexit. The term 'attribution error' has almost been invented for the era that awaits us.

What is likely is that things will never get as bad as many naysayers expect, while Brexit also won't fundamentally transform the UK into a utopia, as some 'leavers' may hope. Hopefully, if it ever happens, the Bank of England will see this as a sign to raise interest rates. Here's hoping...

About the author: Christopher Morris is an experienced economics and finance writer, journalist and editor, whose bylines include the Financial Times, Sunday Telegraph and Times Educational Supplement. His work has also featured in Newsweek, Seeking Alpha and InvestorPlace, while he is a regular contributor to ValueWalk and Activist Insight.

new window icon
See Our Current Bonds
Christopher Morris