February 1st – A New Day for The UK
February 1st is a historic day for the United Kingdom (UK) as the country officially exits the European Union (EU) and British citizens will no longer be EU citizens. Many benefits, such as the ability to travel and work freely within the EU, will only continue during the transition period ending December 31, 2020.
During the next 11 months, the UK will live in legal limbo, where the country will no longer be represented in the EU’s parliament, but is bound by the EU’s laws and regulations, including any new rules introduced during the transition period. Moreover, the UK must continue to honor its EU budgetary requirements despite the lack of representation.
Labor Mobility Across Borders
UK citizens can continue to work and live in an EU member country, but cannot get a new job in another EU country, limiting their mobility. The same is true for the three million EU citizens currently working and residing in the UK; they can register for settled status before June 2021 in the UK or move back to an EU country. The transition period could limit the UK’s attractiveness for talented EU nationals wanting to work in the UK. After the transition period, EU citizens would need work visas like any other nationalities.
The government-sponsored Migration Advisory Committee recently rejected the UK government’s Australian-style points-based immigration system, which hoped to attract global talent to the UK.
The UK’s unemployment is currently at the lowest level since 1974. Additional worker restrictions are expected to push wages higher for current workers. Furthermore, the UK’s productivity is one of the lowest in Europe, limiting the country’s potential economic growth rate. The shortage of skilled labor and waning attractiveness for talented European workers will have long-term consequences for the economy.
What About Goods and Services?
During the transition period, nothing will change for the free movement of goods and services. However, until a comprehensive trade agreement between the UK and EU is negotiated, businesses on both sides will have very limited visibility into what the future holds.
For many businesses, the working assumption is that operations will be as usual after the end of the transition period. Unfortunately, that will not be the case for many businesses. A hard border between the UK and EU is required for custom checks for traded goods between the continent and the island. Businesses will be required to rethink their operations, locations, supply chains and to re-optimize business models based on new parameters. Undoubtedly, this will further increase red-tape, reduce productivity and increase the cost of doing business in the UK.
How About Monetary Stimulus?
Bank of England (BoE) Governor Mark Carney held his final policy meeting this week. He managed to avoid any bold monetary policy moves before handing the reins to the new Governor, Andrew Bailey.
Monetary policy has been on hold for while with the economic outlook deteriorating recently. Inflation has been on a downward trend since the beginning of 2019, opening the door for a rate cut in 2020. Unlike most major central banks, the BoE has waited for more evidence of an economic downturn before supporting the economy with a rate cut.
Strong Mandate but Hard Decisions Ahead
Last year, UK Prime Minister Boris Johnson’s Conservative Party won a landslide parliamentary election, the party’s best results since Margaret Thatcher’s last election in 1987. Those strong results will empower Johnson to shape UK politics for years to come.
The highest priority is negotiating a comprehensive trade agreement with the EU, its largest trade partner, before signing any other trade deals, such as with the US or other major countries.
Scottish nationalists were also winners at the last election and have been waiting for their time to have a voice, perhaps for a second Scottish independence referendum, especially if the EU trade agreement does not benefit the Scottish economy in the long run.
Brexit noise and uncertainty has lasted longer than three years. Since the June 2016 Brexit vote, British assets, especially currency (the pound) and equities, became unattractive due to heightened uncertainty. Investor interest in UK assets recovered after the December 2019 parliamentary election, delivering an initial boost to the currency and stocks with small market capitalizations within the country.
However, the sluggish economic growth in Europe, coronavirus worries, trade agreement negotiations with the EU and nervousness due to practical deadlines for Brexit (December 2020) could keep investors away for another year.
Brexit is finally moving forward and the complex work of implementation must now happen. While not impossible, the list of major items that need to be resolved is daunting.
Key among those items is a comprehensive trade agreement with the EU. The UK and EU have just 11 months to hammer out a trade deal along with re-installing hard borders for goods transit. While trying to please multiple trade partners, the UK may potentially alienate itself and irreparably damage its relationship with its European partners.
We would be pleasantly surprised if the trade agreement is in place and border checks are up and running without any glitches before the end of the year. Like the previous Brexit deadlines, the year-end deadline could be extended multiple times until a workable solution is found.
On the other side, the remaining European Union is still one of the major economies in the world, nearly as large as the Chinese economy in terms of gross domestic product. It has the potential to shape global political direction, environmental policies and offers a talented and well-educated workforce.
This material was provided by SunTrust Private Wealth Management for use by BB&T Wealth
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