With all eyes on the US Presidential Election – and perhaps half an eye on the second-wave of Covid-19 sweeping Europe and the US – what about Brexit?
There’s a 50/50 chance of a trade deal between the UK and EU. That’s according to EU Internal Market Commissioner Thierry Breton.
In this video, the 50/50 chance and what it could mean for your money.
EU Internal Market Commissioner Thierry Breton, speaking on French television this morning, said there’s a 50/50 chance of a trade deal between the UK and EU.
Speaking on France 2 television, Breton said:
We are extremely clear on the conditions and the access to our European market.
He went on to say that the UK has more to lose than the EU from talks breaking down, and a “no-deal” Brexit.
This statement backs up a progress report from negotiators earlier this week.
EU Brexit negotiator Michel Barnier, and UK Brexit negotiator Lord David Frost said there were still major divergences between the two sides.
We seem to be stuck on fishing rights, guaranteeing fair-play rules for companies, and how to solve any future trade disputes.
This was a big week for trade talks with the conclusion of 2 weeks of talks, after UK Prime Minister Boris Johnson last month threatened to pull out of talks with Brussels, after their refusal to compromise on the outstanding issues.
Formal negotiations in Brussels ended on Wednesday, but there are further talks planned in London this weekend.
There’s a mid-November deadline looming for agreeing on a Free Trade Agreement, but the suggestion right now is that we could be heading towards a no-deal outcome.
How bad would that be for the UK economy?
Remember it would come on top of Covid-19 impact.
The Bank of England said yesterday the UK economy is forecast to shrink by 11% this year, and then grow by just 7.25% next year. Only a forecast of course.
On the immediate hit of Brexit, trade deal or not, the Bank said in its report:
The expected reduction in exports, and the impact on domestic supply chains, reduces projected GDP directly by around 1% in 2021 Q1.
The size of the GDP of UK economy last year was around 2.21 trillion pounds. A 1% hit would reduce the size of the UK economy by around £200 billion, so less than the £150 billion the Bank agreed to print yesterday to boost their bond-buying programme.
Bank of England forecasts do however assume current Covid restrictions are eased by the start of next year. There was an extension to furlough announced by Rishi Sunak yesterday, to the end of March 2021, which suggests a growing risk that might not happen.
What about on the other side of the English Channel?
Earlier in the year, the RAND Corporation in the US ran a series of scenarios.
They concluded that the UK leaving the EU on World Trade Organisation rules would cost the UK economy 4% of GDP, and the EU27 0.7% of GDP. Keep in mind, the EU 27 economy is valued at around $18.3 trillion dollars, or around £14 trillion pounds, so 6.3 x the size of the UK economy.
So a larger economic hit in cash terms for the EU than for the UK, if the UK left on WTO rules. But of course, absorbed across more national economies.
So, I don’t think it’s fair to say the UK has more to lose than the EU from trade talks breaking down.
The percentage hit to the EU might be smaller, but the cost to its economy could well be more significant than the cost to the UK economy.
That said, it will be incredibly difficult to unpick the economic impact of Brexit from the economic impact of Covid-19, especially if this second wave continues throughout the winter months, and into Spring 2021.
What does it all mean for your money?
It makes sense to expect the best but prepare for the worst.
We still expect to see some form of trade deal – probably not a free trade deal, with all the bells and whistles, because the EU doesn’t want to signal to other members that leaving the bloc would result in favourable terms.
Earlier this year, Nigel Farage predicted that Italy, Poland and Denmark would be next to leave the EU – not sure he’s right on that, he’s not right on very much, but a favourable trade deal between the UK and EU might ignite conversations about the value of staying or leaving.
So, while the EU talks about a 50/50 chance of a trade deal, which of course means a 50/50 chance of a no-deal Brexit, we should be reasonably optimistic about some form of trade deal being struck.
If you have savings in EU banks, look carefully at depositor protection as it will apply after the transition period.
We know here in the UK, savers are covered by the FSCS by up to £85,000 per bank, per saver – up to £1m for temporary high balances, but the rules will be different in a post-Brexit EU, for UK savers in EU banks, with the worry being UK savers would be at the back of the queue in the event of a default.
On pensions, UK citizens living in the EU have enjoyed seeing their state pension income uprated each year in line with the triple lock guarantee. That’s going to keep going until March 2023, if there’s a no-deal Brexit, but after that will depend on future agreements between the UK and EU.
More generally though, if you’re living in the UK or EU, the best thing you can do right now to protect your personal finances against the eventuality of a no-deal Brexit, or a limited trade deal, as I think is most likely, is to get your financial house in order.
Go back to basics. Look at your budgeting, clear expensive unsecured debt, boost your cash emergency fund (preferably in UK, not EU banks), and make sure your investment portfolio, including your pension pot, is well-diversified across a variety of mainstream investment assets.
