This was published 5 years ago
Opinion
A 'no deal' Brexit would rock 2019 global outlook
Stephen Bartholomeusz
Senior business columnistTheresa May’s decision to defer a vote on her Brexit deal has brought the UK and European Union closer to the most disruptive and destructive outcome; the "no deal" option that would see the UK exit the European Union next March without any transition period or agreed relationships.
The UK, European and even the US financial markets shivered when the news broke of her decision not to put the deal her government had agreed with the EU to a vote in the House of Commons, where it faced certain defeat.
Where previously Brexit might have been seen in the US and elsewhere as an issue of little real significance to the rest of the world - something akin to a domestic dispute - the prospect of a "no deal’’ outcome, with all the chaos and uncertainties that would produce for the UK and EU, is being seen in a wider context.
The US, China and the EU are the world’s largest economies. The US is engaged in trade conflict with China and the Trump administration has threatened to initiate a similar conflict with the EU.
The EU economy is fragile – Germany experienced a contraction in GDP growth in the September quarter – China’s growth rate has slowed and there is a question mark over the sustainability of the strong growth in a US economy as the impact of the Trump tax cuts and spending binge begins to wane next year. The world’s other big economy, Japan, also had negative growth in the third quarter.
If the UK were to crash out of the EU on March 29, overnight most of its goods would be subject to European tariffs and taxes. There would be hard borders and customs posts at the UK and European entry points and the "passporting’’ arrangements that allows financial products and services to flow between the UK and the EU would be torn up.
A hard exit would also place a question mark over the status tens of trillions of dollars of derivative contracts.
London’s exchanges and clearing houses dominate the European market for derivatives like interest rate swaps and futures. It is also the entry point for global banks and other financial institutions to the UK and EU markets. The status of financial contracts would be unclear in a hard Brexit.
In the event of a no deal exit, the UK economy would be savaged – the Bank of England has said it would face its worst recession since the Second World War – but the EU wouldn’t escape unscathed, with the timing of Brexit occurring at a delicate moment.
Despite the soft economic data the European Central Bank is still expected to announce that it will end its net purchases of government and corporate bonds on Thursday.
Theresa May leaves the British Parliament after deferring the Brexit vote. A 'no deal' Brexit looms larger.Credit: Bloomberg
Since 2015 the ECB has bought €2.6 trillion ($4.1 trillion) of bonds in its version of quantitative easing, injecting liquidity into its bond market and putting a ceiling on EU interest rates. Its corporate bond buying has seen it acquire about €175 billion ($276 billion) of corporate debt, or about 20 per cent of the corporate debt issued since it began that program in 2016.
While it will keep the EU policy rates low and reinvest the proceeds from maturing bonds, a decision to halt net purchases could result in higher rates on EU government and corporate debt coinciding with the slowing down of an already-sluggish Eurozone economy.
If Donald Trump trains his sights on the EU and, as he has threatened, slaps steep tariffs on its auto exports to the US, the eurozone would face some very significant challenges.
Many of the governments in the bloc, particularly in southern Europe, are overloaded with debt and the European banking system, a decade after the financial crisis, is still vulnerable.
Apart from the implications for global growth from a hard Brexit it would add to the sense, generated by Trump’s deluded conviction that "trade wars are good and easy to win’’ that the post-war era of multilateralism is ending.
She could also call an election, which the Tories would almost certainly lose, leaving Jeremy Corbyn’s Labour Party to deal with the mess.
Theresa May has options. She has said she will go back to the EU, seeking "assurances’’. The EU has said it will listen to her but that the deal will not be renegotiated.
She could call for a second referendum, although that would probably create lasting and bitter divisions between the "leavers’’ and the "remainers’’.
She could also call an election, which the Tories would almost certainly lose, leaving Jeremy Corbyn’s Labour Party to deal with the mess. That would probably unnerve UK and European financial markets as much as a hard Brexit.
The potential for the trade conflicts and tensions to worsen, the slowing growth in Europe, China and Japan, the prospect that the US Federal Reserve might keep raising US interest rates even as the US economy’s growth rate starts to ease and the uncertainty over the nature of Brexit and its fallout suggest that the first half of 2019 may be a particularly volatile and challenging period for financial markets and, potentially, real economies.