With a year to go before the United Kingdom officially leaves the European Union on March 29, 2019, British companies and households are preparing for the new reality. While the United Kingdom didn’t end up in recession, as opponents of Brexit emphasized before the vote, there are still a number of implications with which British businesses have to deal with.
The Brexit vote in June 2016 sent shockwaves through the markets, with the British pound falling from $1.50 in June, to a low of $1.16 in October 2016. Not only did the sterling fall against the US dollar, but against all other major currencies as well. This drop in the currency’s value sparked inflation, and made imports – which account for a significant amount in the UK’s deficit-run current account – more expensive.
Property Market Benefited from Weaker Pound
Still, a weaker pound also attracted a growing amount international investments in the United Kingdom’s property market. While many analysts predicted a drop in property prices as a result of businesses leaving the United Kingdom and looking for establishing headquarters in the European Union, investors – mainly from Asia - took the advantage of the weaker pound and bought residential and business real-estate across the country. This put a support under the UK’s property market.
Another signal that could help the British pound gaining ground is the expected interest rate hike in May. The markets are already pricing in a 90% chance that the Bank of England will increase interest rates at its next meeting in May, in order to cap inflation which already broke the BoE’s inflation target and reached 2.7% early this year – after hitting a six-year high of 3.1% in November 2017.
UK’s Financial Sector at Risk
Financial services account for a significant amount of UK’s gross domestic product and are one of the main drivers of the country’s GDP growth. Between October and December 2017 alone, financial services grew by 0.9% which makes this a hot topic in Brexit talks.
The European Union seems uncompromising however, and stated that UK banks have to relocate a large number of back and front-office staff to EU member states in order to keep access to EU’s single market. As a result, many UK banks are already establishing their offices across the European Union, mostly in Frankfurt and Paris. According to UK’s banking regulator Sam Woods, around 10,000 British finance jobs are at risk on the “very first day” of Brexit, while the total number of lost jobs could easily climb up to 75,000 in the following period.