Britain's Prime Minister Theresa May. (AFP)
Britain's Prime Minister Theresa May. (AFP)

Opinion | The reducing likelihood of a no-deal Brexit

EU nations are also at risk of economic disruption in case Britain leaves without a trade deal

In late February, UK Prime Minister Theresa May surprised politicians and the business community of Britain by announcing that parliament may be called upon to vote on whether to roll back the 29 March deadline to leave the European Union (EU). The purpose of the delay would be to gain more time to negotiate a deal with the EU that is acceptable to parliament, as the one already negotiated by her government is struggling to win approval from hostile Members of Parliament.

This comes after the largest opposition party, Labour, decided to back a second referendum on Brexit. As of now, anything from the UK leaving without a trade agreement with the EU (a “hard" or “no-deal" Brexit) to a second referendum is considered a realistic possibility. So what are the likely outcomes and how will they impact the economy?

Early clues about the effect of a hard Brexit are reflected in the latest growth figures. The UK’s gross domestic product (GDP) growth has slowed, slipping to 1.4% in 2018 from 1.8% in 2017, with much of the slowdown coming in the fourth quarter (Q4), just as Britain draws closer to leaving the EU. The Q4 2018 GDP figures show a sharp contraction in manufacturing output. Some carmakers are preparing to move production out of the UK. In contrast, services growth has only seen a moderate loss of momentum.

To begin with, manufacturing is arguably under huge pressure on account of a probable bottleneck in road, rail and sea traffic that is expected to develop at the port of Dover in case of a hard Brexit. Customs checks will also need to be introduced.

Dover is the key port for trade between southern England and continental Europe. A recent study found that if customs checks last just 70 seconds, it will take six days for lorries to transit the port. Given that customs checks on the EU’s border with Switzerland last 20 minutes, there is little possibility of authorities achieving a figure so low.

The UK’s major supermarkets would also come under strain. The UK imports large quantities of food, particularly fresh fruit and vegetables, from Europe, and there is a high risk that shops may be left with empty shelves.

The next biggest issue would be steep tariffs. Not just manufacturers, but farmers down the chain will need to brace for hefty duties. Cross-border supply chains will have to incorporate a hitherto unknown factor in output pricing strategies and develop a mechanism for remaining competitive.

While services will face no tariffs, specific sectors such as finance and insurance must prepare for impending regulatory barriers. These could be fairly daunting and onerous, leading to pressure in the longer term.

The question is: Does a hard Brexitmake sense politically? The key to understanding this lies in decoding voter bases across the UK economy. Given that UK’s agricultural areas generally vote for Conservative MPs, as does London’s stockbroker belt, while its manufacturing towns are usually pro-Labour, one is bound to ask whether the two main political parties will really allow all this to happen and risk the wrath of voters. If not immediately, then in a very short time.

Until now, May has been reluctant to publicly rule out the possibility of a “no-deal Brexit", so the threat of the UK leaving could be used as a negotiating tool for a deal with the EU. It should be remembered that the EU nations are also at risk of economic disruption in case of a hard or “no-deal Brexit". For instance, most foreign currency purchased by European banks and firms is bought through London’s financial markets. Also, many European fishing boats operate in the UK’s territorial waters.

However, the political need to hold her government and party together means that May must now offer parliament a vote on whether the UK can go down the “no-deal" route at all, or delay leaving instead. This reduces the likelihood of a hard Brexit, given that in the June 2016 referendum, most MPs campaigned to stay in the EU.

So what are the alternatives to a hard Brexit?

First, the House of Commons could back the deal that May has struck with the EU. However, that agreement is currently unpopular with British MPs because of clauses that might result in a customs border between Northern Ireland and the rest of the UK. May is now trying to negotiate new concessions from the EU to make her deal more acceptable to MPs.

Second, parliament could decide that the people must vote again in another referendum, an option that’s very unpopular with pro-Brexit MPs. Third, a deal similar to that which Norway has with the EU could emerge, which grants the country access to the EU market but Oslo gets little say in the latter’s rules. Fourth, a free trade deal similar to the one Canada has with the EU, which would offer a lower level of market access.

At present, it is difficult to say which option will prevail. However, from an economic perspective, a hard Brexit appears to have a decreasing likelihood. This is why the pound, having hit a low of $1.25 in early December 2018, is now trading above the $1.30 mark, and rising. International money is coming into the UK in anticipation of an economic turning point.

We are likely to enter a new zone of political and industrial revival. The world watches.

James Roberts is chief economist, Knight Frank.

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