REPORT
By Gökhan Kurtaran
London letter, week beginning August 15

 

- Serenity of Swiss Alps vs. mounting uncertainty in Westminster

U.K. Prime Minister Theresa May is currently having some time off from the political cacophony and seeking peace and quiet on an Alpine walking holiday in Switzerland. But waiting on her desk for her return back at Number 10 are certain outstanding issues on the outlook of the U.K. economy.  So far the “all quiet on the Western front” stance means that there is a lack of clarity on the direction of the British economy. However, the movement of people and services remains in question with the lack of signs that the U.K. will be a part of the single market.

According to the Institute for Fiscal Studies (IFS), maintaining the U.K.'s membership of the EU's single market could add an extra 4 percent to its economy. Last week the IFS think tank weighed up the benefits of staying in the single market compared with membership of the World Trade Organization (WTO) alone. Before the EU referendum, the Brexit camp emphasized that the U.K. could access the single market via the WTO membership. However, the question of whether this status is the same as being a member of the single market lingers.

Paul Johnson, IFS director asserts there is a big difference between access and membership of the single market;

"We've heard a lot of people saying of course we'll have access if we leave the single market union. Broadly speaking, yes, we will, as every other country in the world does. You can export into the EU wherever you are from, but there are different sorts of barriers to doing so,” he said.

According to the same study, while leaving the EU would free the U.K. from having to make a budgetary contribution of £8 billion, the loss of trade could depress tax receipts by a larger amount. The study found that new trade deals would be unlikely to make up for lost EU trade, which accounts for 44 percent of British exports and 39 percent of service exports. In this sense, staying out of the single market does not materialize as a good plan regarding the economic outlook of the country.

But what is even more concerning at the moment in Canary Wharf and the City of London - the two financial hubs of the U.K. - is that Brexit with no deals with the EU members’ states might result in the loss of considerable business in Europe and elsewhere. London’s biggest financial center rivals, Paris, Frankfurt and Luxembourg are already in extensive talks with financial institutions based in London with attractive incentive packages such as lower tax rates.

The IFS report also underlines this risk as well. The report said U.K. financial services would be particularly vulnerable if the government were unable or unwilling to negotiate a replacement deal and become a member of the European Economic Area (EEA), like Norway.

According to the report, financial services, which generate 8 percent of the U.K.'s economic output, might suffer in particular if a final Brexit deal means that the U.K. will lose so-called "passporting rights" allowing direct sales to EU customers and businesses.

Even though the Bank of England (BoE) acted swiftly and took serious measures in order to avoid the possibility of a recession, without concrete steps taken on the political ground via negotiations with EU member states, markets will continue to perceive prolonged uncertainty as a growing risk for long term investments.

 

15 Aug,2016

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