The process of determining the nature of that departure has already had a considerable impact on the value of sterling, as well as on key markets that affect UK consumers.
This period of uncertainty has caused the pound to become uncharacteristically volatile, while the retail sector and the property market have also felt the effects.
Commercial banks and investors follow news reports to guide their strategies, with seemingly every news report in the past three years linked to Brexit in some way. Positive economic and political news encourages investments in forex trading markets, thereby boosting the value of a currency. The continued uncertainty surrounding Brexit can only be interpreted by dispassionate markets as bad news for business.
With no consensus for the most suitable resolution to Brexit, it is difficult for investors to find faith in the British pound. At times when there appeared to be a pathway to a definitive resolution, the pound was resurgent. Ahead of a snap election in 2017, investors rallied around the pound on forex trading platforms in the expectation that a new Conservative majority would push Parliament towards a "final" decision, although that proved to be overly ambitious.
Boris Johnson’s arrival as Prime Minister made a no-deal Brexit more likely, which caused the pound to plummet to its lowest point since 2016. However, Parliament’s move to legally block a no-deal Brexit emboldened the pound to recover. With a Conservative majority as the result of the election on December 12, this will have surely pushed investors to make a more concrete decision regarding their involvement in the GBP market.
While politicians are dealing in hypotheticals, the fluctuating value of the pound has already had tangible effects on UK holidaymakers. Those exchanging currency in the immediate aftermath of the referendum will have had a nasty shock, with sterling crashing by 19% once the result was announced. That drop has ushered in a continuing period of volatility. A holiday that coincides with a key Brexit decision can see a citizen return to the UK to find their money is worth far less in sterling than it was when they left.
Data taken from the Office of National Statistics reveals the top ten holiday destinations for Brits in 2018:
1. Spain – 15.62 million visitors
2. France – 8.56 million
3. Italy – 4.16 million
4. USA – 3.47 million
5. Republic of Ireland – 3.42 million
Rounding out the top ten are Portugal, Germany, Netherlands, Poland, and Greece. Eight of those countries use the euro, with Poland’s złoty and the US dollar being the two exceptions. The GBP/EUR trading pair has particular significance for UK holidaymakers, while the global prominence of the US dollar also makes the GBP/USD pair one of the most important for traders and tourists alike. As of November 15, the GBP was trading at €1.17 and $1.29.
The pound leapt to a six-month high against the euro as the odds of a Conservative majority shortened. Exchanging money now could see holidaymakers take advantage of a beneficial rate against the euro, but the realisation of a Conservative majority may drive prices even further in the GBP’s favour. Conversely, for some, this may feel like a reprisal of 2017, when the potential of a Conservative majority caused the pound to spike, but the Conservatives were unable to transform that potential into a performance at the polls.
If holidaymakers expect 2017 to repeat itself, then this could feasibly be the pound’s highest ebb against the euro for many months ahead. The same trends are ultimately reflected in the GBP’s relationship with the USD, although there is also the US-China trade dispute to consider. Political uncertainty on both sides makes it hard for British citizens to predict the most advantageous time to exchange funds. Until there is a degree of finality, the markets will be unable to settle.
The average weekly food cost for a typical UK household in 2018 was £91. That figure was the result of a 3.1% rise from the previous year, and further rises can be expected as the Brexit saga continues. The fear of a no-deal Brexit is the biggest driver behind collapsing the pound and instigating a rise in inflation. Earlier this year, Johnson’s pledge to leave the EU by October 31 prompted market analysts to share their worries about inflation, with even the most carefully planned no-deal departure likely to provoke a 4% rise in inflation. Johnson ultimately failed to build the consensus across Parliament that he needed to keep his promise.
Despite a Conservative win in the election that enables them to pass Johnson’s Brexit deal, it may not rule out a no-deal departure. The former Tory cabinet minister David Gauke warned the British people that a Conservative majority would be a precursor to a no-deal exit at the end of 2020, as no government would be able to secure the requisite trade agreements in such a short space of time. That fear means that a deal secured by a new government may provide some short-term clarity, but the persistent threat of no-deal could cause further rises in inflation and inhibit economic growth.
The possible benefits of departure from the EU may not be felt for several years after a no-deal Brexit. The UK Trade Policy Observatory stated that "this growth in domestic production will come at the expense of higher domestic prices for consumers", while it will take time for that domestic production to reach a stage where it can fill the void left by EU goods. While trade tariffs with countries like Australia and South Africa can be reduced, they will almost certainly be unable to compensate for the loss of trading infrastructure with EU countries.
Most rises in inflation and falls in currency over the past three years have been the product of the looming threat of a no-deal Brexit. The actuality of a no-deal Brexit could have an unprecedented impact on both, with the average consumer paying the price in their weekly shop.
Most people’s most significant outlays are expenditure on properties. With bigger sums of money at stake, even the smallest change in inflation rates or currency value can cost a consumer hundreds of pounds. It is worth comparing house prices today with their value in 2014, which was the last full year before the Conservatives' 2015 commitment to a referendum.
Average house prices in the UK rose by 1.3% from the start of the year up to September 2019, although ONS data reveals that the growth in the UK property market has generally slowed down in the past three years. The property market in Yorkshire and the Humber has been one of England’s most robust in 2019, with its 2.2% house price growth only surpassed by the North West’s 2.8% rise.
If the UK does achieve an orderly departure from the EU and avoids a recession, then Yorkshire and the Humber’s property market is set to be one of the UK’s most successful in terms of growth. House prices could rise by 21.4% between 2020 and 2024, surpassing the anticipated UK average rise of 15.6%. However, that is predicated on that massive 'if', with the property market at the whim of any major political development in the coming months.
The past - 2014
The average UK house price was £186,772 in 2014. Experts had predicted a 6.5% growth in house prices for this year, but a healthy property market exceeded expectations with a rise of around 9%. This larger-than-expected growth outpriced many buyers from the market, although there was comfort in some analysts’ predictions that the property market would flatline in 2016. Brexit then made a mockery of those forecasts.
The present - 2019
The highest average overall housing price in England was reached in July at a value of £232,710. House price growth fell severely in the UK immediately after the referendum (apart from Scotland, which flatlined), but the rate of growth slowly picked up in subsequent years. It is difficult to make a concrete link with the current state of play and the Brexit uncertainty, with Which? suggesting that this slower rate of growth could be a necessary and overdue correction to the market. This could help buyers to gain an advantage in the property market.
The future - no deal in 2020
A no-deal Brexit would have clear effects on house price growth. KPMG anticipates a fall in house prices by around 6%, which would take the average UK house price to £218,282. A worst-case scenario would see a decline by 20%, likely as a consequence of a recession. KPMG aren’t alone in their damning assessment of a no-deal Brexit, with the Office for Budget Responsibility forecasting a fall of 10% in house prices by mid-2021. The rise in inflation and the fall of sterling may cause buyers to struggle, thereby generating frustration among sellers.
The future - deal in 2020
KPMG have a more positive outlook if a deal is secured. Prices would be expected to stabilise in the immediate aftermath of a deal, before achieving growth of around 1.3% in 2020. This would take average house prices in the UK up to £235,735. If that deal proved to be a gateway to a no-deal Brexit, then those who buy new property in 2020 could be subjected to a considerable loss in value. However, if a deal is fully completed then the property market can thrive in a more stable economic situation.
The life of a British consumer between 2016 and 2019 has been inextricably guided by Brexit. It looks like at least the next year will be similarly dominated by the Brexit process, but in 2020 we may gain a clearer idea of the UK's economic outlook for the next decade.
IG is a global online trading and investments provider. For more information visit their website