With the new coalition government only just beginning negotiations over the UK’s departure from the EU, it is difficult to know what shape the UK economy may take post-Brexit.
As Russ Mould, investment director at AJ Bell, puts it: “I’m not sure anyone knows quite what the UK will look like after completion of the negotiations, even those who are doing the negotiating.”
The Conservative government has said a deal whereby the UK leaves the single market is their preferred outcome, although whether they will stick to this strategy as the negotiations continue remains to be seen.
The International Monetary Fund has already downgraded its growth predictions for the UK economy this year, to 1.7 per cent from 2 per cent, but even this could be optimistic, argue some as growth in the first half of 2017 has been slow.
Michael Baxter, economics commentator for The Share Centre, cautions: "With real wages falling, and likely to carry on falling, political instability and uncertainty over Brexit is likely to have a negative impact on corporate investment, there is a good chance that the second half of this year will only see a modest improvement on the first half.
“Investors shouldn’t be surprised if the IMF downgrades again."
Finding a framework
How the UK economy looks will largely depend on whether any deal at all has been reached by the end of the two-year negotiating period and how much longer discussions continue beyond the deadline.
Mr Mould suggests: “For now, World Trade Organisation (WTO) status looks to be a worst case in Britain’s future dealings with the EU, so that may provide a template for anyone doing a scenario analysis.”
The UK has been a member of the WTO since January 1995, and all EU member states are WTO members. Importantly though, the UK’s membership is tied in with the EU’s at the moment.
The WTO model has been referred to as the framework the UK will rely on should there be no deal in place on 30 March 2019.
But Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, warns there is no such scenario as falling back on WTO status, as even this would have to be negotiated.
“It isn’t the case you can easily fall back on WTO rules in the way you might go back to factory settings on a computer because they’re not just sitting there as a default,” she notes.
“Most of the arrangements through which trade flows through ports and is admitted to be sold in UK shops actually have nothing to do with the WTO, they have to do with boring mutual recognition arrangements that have been negotiated and agreed over decades between countries bilaterally, or as part of the EU and are nothing to do with the WTO.
