AMP Capital economist, investment strategy and dynamic markets, Diana Mousina said with Theresa May officially stepping down as leader of the Conservative Party, and former London Mayor Boris Johnson leading the polls, the market is now concerned about the risk of a hard Brexit where the UK leaves the EU without a formal agreement in place.
“We believe the new Prime Minister is likely to take more of a hard Brexit stance compared to Theresa May who wanted to leave the EU with some sort of agreement in place,” Ms Mousina said.
“Johnson himself supported Brexit and has flagged he would pursue a ‘no-deal’ Brexit if he can’t renegotiate a better deal with the EU.”
A hard Brexit or no-deal Brexit, she warned, would have “significant implications for the UK, EU and global economy and investors”.
“It would potentially be disadvantageous for trade between the EU and UK. The UK and EU would have to trade under World Trade Organisation rules. The UK would leave the single market and customers union and it would lose access to trade with its largest trading partner,” she explained.
“It would probably lead the UK into a near-term recession. It’s predicated a hard Brexit could cut UK GDP by 3 to 4 per cent over two years.”
Over the long run, it could lower UK GDP by around 1 per cent due to slowing productivity and population growth.
“Those negatives could have flow-through effects to Europe at a time when the Eurozone economy is quite weak. A hard Brexit could shave around 0.5 [of a percentage point] to 1 per cent off Euro growth over two years, according to the Bank of England,” she noted.
“The EU makes up around 21 per cent of the world economy, so there may be a small, likely negative impact to world GDP.”
Ms Mousina said it is possible that the new Prime Minister will be able to negotiate a better agreement for the UK to leave the EU, although it might take some time to get there.
“Although the Brexit date is set for October 31, it’s still possible that date could be pushed back to later in the year,” she said.
While a soft Brexit would still have some short-term negative impacts on growth because of lost trade, they would likely be relatively small.
