A Brexit deal appears to be on the table. At the time of writing this article, there is still no formal announcement but starting with yesterday in the afternoon, rumours circulated among different financial outlets that the two parties have agreed to a deal.
With that off the table, one wonders what lies ahead for the United Kingdom in the year ahead? What will a Brexit deal mean for the economy? While it is better to leave with a deal than without one, the U.K. economy is set to underperform both the European and the United States ones.
Unemployment Pressure to Rise
The sign-off of a free trade agreement expected to be announced today will not lift the unemployment pressure. With a deal in place, both the European Union and the United Kingdom will agree on some measures to mitigate the early impact of a Brexit.
However, pressure on unemployment remains, especially considering the COVID-19 lockdown measures expected to remain in place well into 2021. Approximately 6% of employees or 1.7% million jobs are at stake, as this is the number of people fully furloughed in October before the new round of restrictions came in.
Bank of England to Keep the Accommodative Monetary Policy
The Bank of England responded swiftly to the Brexit challenges and in recent years, have run various scenarios regarding the impact of a hard or soft Brexit. Unfortunately, as this was not enough from an uncertainty point of view, the pandemic added a new dimension to the challenges the central bank faced.
One thing is for sure – with the bank rate already close to the lower boundary and the quantitative easing program running at full speed, we should not be surprised to see the Bank of England shifting to negative rates policy, should the need arise.
The Fall and Rise of the Pound
Since the 2016 referendum, the British pound lost the 1.50 level against the U.S. dollar and never looked back. Traders in the city compared the pound’s price action in the last years as being like an emerging market’s currency, saying much about the impact the referendum had.
The rate recovered lately on the back of a weak dollar and Brexit deal hopes. Will it recover even more? Unlikely, considering that the deal should be priced in already.
All in all, today is a historic day, and it happens to be Christmas Eve too. Everyone wants to see Brexit done, so we can all eliminate the uncertainty of the last four and a half years and move on.