The UK parliament is back in session and all eyes are on the British Lion as October 31 looms.
That’s the date new prime minister Boris Johnson promises to take the UK out of the European Union, deal or no deal.
So-called EU “remainers” are hanging onto the prospect that the UK Labor party will be back in power before October 31, as a result of a hastily-called special election. If that happens, the EU might agree to an extension of the October 31 deadline, although there’s no guarantee of that.
British courts are now involved, too, over the question of Johnson having the legal right to reject any extension and sticking to the October 31 deadline
Consequently, given the status quo, what’s happening with Brexit right now is a question worth examining. More importantly, as the status quo signals “no extension,” what would an October Brexit exodus mean to the British sterling, to EU country economies, and to countries who conduct major currency business with both the UK and the EU?
Here are three likely outcomes for Brexit if no deal is reached in 2019, let alone by October 31.
Road to Recession.
A “no deal” Brexit would lead to economic calamity, economic experts say. The global accounting firm KPMG predicts a severe recession in 2020 for the UK, if no Brexit deal is reached this year.
This from Yael Selfin, KPMG UK’s chief economist:
– “With the Brexit debate poised on a knife-edge, the UK economy is now at a crossroads. It is difficult to think of another time when the UK has been on the verge of two economic out-turns that are so different, but the impact of a no-deal Brexit should not be underestimated."
– "Despite headwinds such as the slowing global economy and limited domestic capacity, the UK economy now has the potential to strengthen over the next 12 months. But a no-deal Brexit could derail this upside, triggering the UK's first recession for a decade."
KPMG estimates that UK gross domestic product would decline by 1.5% with a significant loss of business and consumer confidence.
The British Pound Will Continue its Free Fall.
On the eve of the June 23, 2016, Brexit vote, sterling prices stood at just below $1.50 (in U.S. dollar terms). Today, as officials frantically try to reach a deal before October 31, the pound is valued at $1.29.
That slide in the pound’s value impacts the entire UK economy and by extension, any global company doing business in Britain, the 7th ranked country in the world as measured by nominal GDP.
Any continued decline will take a toll on the UK economy, which would impact a vast array of financial measurables, from the cost of purchasing a home in Liverpool to the price to fill a driver’s Volkswagen Polo at the pump – and every consumer and business cost in between.
That’s bad news not only for UK consumers, but for any company operating in the UK, as a weaker pound boosts the cost of imported goods (like oil from Saudi Arabia or lumber from the U.S.) overseas.
Tough Calls – Again – for Senior Financial Executives.
It’s back to the future for senior corporate financial officers.
Immediately following the June, 2016, UK referendum that resulted in a majority vote to leave the European Union, global chief financial officers, treasurers, accounting officers and other senior corporate decision makers conducting business in Great Britain and the EU countries faced extremely volatile foreign currency markets and a suddenly lackluster British pound.
Three years later, its déjà vu all over again. As the Brexit deadline fast approaches, and as UK and EU policy makers hammer out a last-minute proposal, involving complex legal and political language, uncertainly hangs over the corporate management of Brexit-related financial fallout.
With that uncertainty in play, it will be up to corporate financial officers to manage the severe foreign exchange volatility that will follow any Brexit missteps, especially on the capital funding, cash management and counter party risk fronts, for their companies.
Access to cash and getting a grip on relationships with financial institutions in the UK and in the EU world will especially be big priorities.
Uncertainty Rules – Again
Cleary, there’s no way of knowing exactly what will happen leading up to, including, and after a Brexit deal is reached by the end of October, especially with an endless army of politicians, lawyers, and bureaucrats involved in the proceedings.
Yet if no deal is agreed upon, the economic fallout will likely have a ripple effect that spreads thousands of miles outside UK – and it won’t be pretty.
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