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Potential impact of hard Brexit as PM May's proposal falls apart


Devdiscourse News Desk United Kingdom
Updated: 16-01-2019 21:53 IST
Potential impact of hard Brexit as PM May's proposal falls apart

The Bank of England has warned that a worst-case Brexit -- involving border delays and markets losing confidence in Britain -- could shock the economy into an 8 per cent contraction. (Image Credit: Flickr)

Britain is due to leave the European Union in 10 weeks' time but it still has no clear way out of the bloc, raising the prospect of no transition period to smooth the shock for the world's fifth-biggest economy. Prime Minister Theresa May suffered a major defeat on Tuesday when a huge majority of lawmakers -- many of them from her own Conservative Party -- rejected her Brexit plan.

Following is an outline of the potential impact of a no-deal Brexit on the economy:

UK ECONOMY

The Bank of England has warned that a worst-case Brexit -- involving border delays and markets losing confidence in Britain -- could shock the economy into an 8 per cent contraction within a year, worse than the impact of the global financial crisis. Output in a less severe but still disruptive no-deal Brexit would fall by around 3 per cent. The BoE also sees risk in Britain's large current account deficit. Much of it is plugged by foreign money pouring into speculative assets, something that could dry up in the event of a big Brexit shock to the economy.

TRADE

Barriers to trade would be raised, at least in the short term, hurting companies on both sides of the English Channel. British exporters would face EU import tariffs which average 5 per cent but are higher for some major exports such as cars which would pay a 10 per cent tariff. Britain's automotive industry employs over 800,000 people. Manufacturers across the board are worried about border delays which would hurt their just-in-time production.

Brexit supporters say those fears are overblown because technology would ease any border delays and exports would flow freely once Britain gets a future EU free trade deal. Deals with faster-growing nations such as the United States, India and China would be a big boost for Britain, the Brexit supporters say. But the country's budget forecasters say the benefits of such trade deals are likely to be small.

PORTS AND STOCKPILING

The government is building lorry parks along motorways and also plans to use an airport in the south of England to cope with any tail-backs at ports on the English Channel. Academics at Imperial College say two extra minutes spent checking each vehicle at Dover and Folkestone could lead to traffic queues of 29 miles on the M20 motorway and A20 road. Many manufacturers are stockpiling parts to keep production lines open.

The British government has asked drugmakers to stockpile medicines for six weeks above normal operations. Brexit supporters say the worries are exaggerated. They point to comments by the head of the port in Calais, in France, who said trucks would continue to move through without delays in the event of a no-deal Brexit. France has said it plans to hire hundreds of additional customs officers and create extra border control facilities.

HELP FROM THE BUDGET AND THE BANK OF ENGLAND?

Finance minister Philip Hammond has built up a fiscal war-chest to spend more in case of a Brexit shock to the economy. But he has also warned that longer term, a no-deal Brexit would mean a rethink of his promise to end austerity because the economy would grow more slowly, hurting tax revenues.

Brexit supporters say leaving the EU with no deal would help the public finances because it would mean an immediate end to payments by London into the EU budget. The BoE has warned investors not to assume that it would rush to the rescue and cut interest rates after a no-deal shock. A fall in the value of the pound would push up inflation, it says, potentially requiring higher borrowing costs.

POUND

Given the likely economic hit, a no-deal Brexit would probably push the pound down, adding to its losses against the U.S dollar of about 13 per cent since the 2016 referendum. Under the BoE's worst-case Brexit scenario, sterling would slump 25 per cent to about the same value as the U.S. dollar.

FTSE

A weaker pound could push up the share prices of many of Britain's biggest companies which do business around the world such as British American Tobacco and GSK in the FTSE 100, which makes 70 per cent of its income overseas. But there could be punishment for the more domestically focused FTSE 250 companies who make half their money at home.

BONDS

The economic shock of a no-deal Brexit would usually spur investors to seek the safe haven of British government bonds. However, a no-deal Brexit would be a major blow to May and could usher in a new national election. The resurgent left-wing Labour Party has plans for big increases in public spending which would unsettle some investors.

(With inputs from agencies.)

COUNTRY : United Kingdom

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