Brexit: Post-negotiations will determine its black swan status
The greatest concern surrounding Brexit is uncertainty and the unknown if the UK does vote to leave the EU, which is forcing many investors to prepare for the worst. It is predicted that if Britain does choose to leave there will be a knee-jerk reaction in markets, however, trade will go on; it is how the UK negotiates its exit from the EU that will determine if Brexit ends up being the next Black Swan as analysts are finding it near impossible to predict the real effect on businesses until new agreements are put in place. Furthermore, some believe that rather than Brexit, the biggest problem the markets face stems from the mounting issues in European banks, a fact we have previously noted. 

We can expect a rise in unemployment, at least in the short term

Regardless of which side of the fence they sit on, it’s generally agreed that there will be a rise in unemployment if the UK leaves the EU. Catherine Barnard, a professor in European Union law at the University of Cambridge says: “Since we project that Brexit would lead to a decline in economic activity, we naturally expect that Brexit would lead to job loss too.” She estimates that around 550,000 jobs will be lost by 2020.

Steve Coulter, who teaches political economy at the European Institute of the London School of Economics, agrees: “Brexit would lead to a fall in growth, jobs and investment in almost all scenarios.”

It’s a change that some say is happening already, particularly for school leavers and graduates, as employers await the outcome of the referendum. Mike Hill, chief executive of Prospects and the Higher Education Careers Service Unit, says: “Planned recruitment for next year’s cohort is still on schedule, but if we vote to leave, there will be a hiatus, which will see recruitment plans either shelved, or numbers to be recruited reduced. Uncertainty delays recruitment and a recession kills it.”

There are a number of options post-Brexit, but none seem perfect

If Brexit becomes a reality, there are a number of possible scenarios. Anthony Robinson, principal campaigns and communications adviser at the Confederation of British Industry (CBI), says that becoming one of the European Economic Area (EEA) states comes with its own challenges: “[It] would enable us to remain in the single market, but we would have no influence over the rules, we would still have to pay [a financial contribution] and accept free movement of people. It’s hard to see this as a valid option given the arguments for leaving revolve around immigration, cost and sovereignty.”

Barnard agrees that immigration remains a key issue. If the UK accepts the free movement of people, “it is possible to ‘do a Norway’ or even a Switzerland – although the EU is not keen on that option.” But if not, she adds: “A trade deal would be possible and UK immigration rules would apply to any EU migrants wishing to come to the UK.”

Perhaps we will look to history for inspiration, suggests Diego Zuluaga, financial services research fellow at the Institute of Economic Affairs. He explains that dealing under unilateral free trade “was Britain’s policy in the 19th and early 20th centuries and massively successful, not least for the poorest workers and consumers”.

It’s difficult to predict the real effect on businesses before new agreements are in place

Experts have identified a number of industries that would lose out if Brexit went ahead – particularly financial services and the automotive industry – but some sectors will find that life improves. Coulter from the London School of Economics says it depends on how the UK will trade with the EU, post-Brexit.

“Most companies in goods markets depend on a complex global value chain, so what matters is how the UK is integrated in the European economic area. If the EU is not the area on which economic decisions depend, then a Brexit might not be a completely crazy idea.”

For those who do export to the EU, little will change in terms of regulations. Catherine Mann, chief economist and head of the economics department for the OECD, says: “If they wish to trade in the EU they will continue to have to comply with EU safety standards and EU competition law in just the same way as US and Chinese companies have to comply.” There may be increases in export duty until new trade agreements are put in place.

There will also be repercussions beyond those businesses that export, says Robinson – foreign investment is likely to slow. “Multinational companies invest here for a number of reasons – language, infrastructure, educated workforce, etc, but being in the EU and being able to conduct European-wide business from the UK is a major incentive.”

There will be a longer-term impact on the economy, but catastrophe is unlikely

Overall, it is the economy that is likely to feel repercussions: “To 2030, the real issue is that GDP is lower by a range from 2.7%–7.7%, and living standards will have deteriorated on account of productivity slowdown and weak investment and lower capital stock,” Mann says.

But Zuluaga says the “likelihood of economic catastrophe as a result of changing trading arrangements is very small,” adding: “The UK will do well either way over the long term because it has got a very resilient and dynamic economy and a large talented workforce.” However, he does believe that a tightened migration policy will make a dent on the country’s potential to grow: “[Migrants] contribute to the tune of an annual £20bn [double the UK’s net EU contribution] to the public finances. They are young and of working age so help to support our benefits and pensions system.”

It’s a risk that many seem willing to take. Angus Armstrong, director of macroeconomics for the National Institute of Economic and Social Research, says: “For some people, the opportunity to have greater say on making one’s own rules and perhaps fewer migrants may mean that the likely economic consequences are simply a price worth paying.”

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