Even before Brexit begins and the modalities of leaving the European Union have been defined, many economic consequences are already visible. Since the beginning of 2016, the pound has lost 16% of its value against the euro and 12% against the dollar, inflation has returned to well above 2% and is starting to erode the purchasing power of families, while the London real estate market shows a worrying reduction in values and in the number of transactions. Many companies and institutions, especially in the financial field, are preparing to transfer their activities and personnel to the continent.
Nevertheless, since the beginning of the year, the markets do not seem to have focused too much on risks related to Brexit. Possibly because it has been a known theme for over two years, the pound and the UK equity market have performed slightly worse than the rest of Europe. Even economists' estimates do not reflect particularly negative scenarios for the United Kingdom, implying the achievement of a favorable agreement.
The debate was, in fact, concentrated on reaching an agreement with the European Union. «Deal or no deal» was the Hamletic doubt that echoed in the Anglo-Saxon press. The absence of an agreement would mean the suspension of trade with the EU with serious consequences, not only from an economic point of view but also from a practical point of view and the supply of certain goods.
It should be borne in mind that about half of the UK's trade with the rest of the world goes to the European Union.
Wanting to simplify, the UK exports services (particularly financial services) and imports products. Despite Trump's offers of help, the United States accounts for only a fifth of trade with Europe and China weighs even less. There is therefore no way to offset the impact of leaving the European Union.
A few days ago, the British media reported on some statements by the Governor of the Bank of England, Mark Carney, who raised an alarm about the failure to reach an agreement with the EU, which could lead to plummeting property values equal to 35%, rate hikes and a financial crisis comparable, for the United Kingdom, to that of 2008.
But which deal is realistic? Is there a possibility of a «soft Brexit»? To date, even if an agreement were found, it would not include services, which are essential to the City's prosperity. In fact, the EU has set the free movement of people as a condition for the opening of the services market, which was rejected by the United Kingdom. It is estimated that around a third of the City's business volume, which represents over 12% of London's GDP and almost 3% of the country, is referred to the EU. It is difficult to make precise estimates in the absence of details of the agreement, but the impression is that London and its housing market will not be able to avoid a significant impact.
Even the timing remains uncertain: the will of the EU and the British government would be to reach a political agreement by November, but the discussion of the details could take a few more months. Based on economic data, which looks to the past, the pound appears undervalued and could partially recover if a favorable settlement is announced. Longer-term though, the aftermath of Brexit will weigh on all UK assets, except (perhaps) the equity market, which sees a strong representation of multinationals with diversified revenues across many currencies. The medium-term scenario for London and its real estate market is therefore very uncertain.
