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What the UK's New PM Means for Canadian Investors

Jon Brown Jon Brown, Stockhouse
0 Comments| July 30, 2019


Click to enlarge
(Image via @BorisJohnson on Twitter)
 
The votes are in, Boris Johnson will become the United Kingdom’s next Prime Minister, after winning the race to lead the governing Conservative Party … what does this mean for investors in the Great White North and around the world?

While it feels like it is happening a world away, but investors across the globe have warned that this ascension would send shockwaves rippling through international markets while putting the fifth-largest economy at risk of recession.

Even further, there have been warnings that a successful Brexit without a divorce deal in place would plunge the UK into chaos along with the European economy, while weakening London and the FTSE’s stature as a pre-eminent international financial centre.

Tariffs will be imposed on goods traded between the UK and the EU, as well as the possibility of losing out on deals the EU has with other countries around the world, including Japan, South Korea, and its’ £800 million trade deal with Canada ($1.3 billion CAD).

This was what Johnson campaigned on and now he has secured his office on the hopes that Brexit will become an official reality, despite parliament’s objection. The likes of US President Donald Trump and Ontario Premier Doug Ford have already logged their congratulations to Johnson, however many feel that now the sun isn’t just setting on the British empire - it’s collapsing into a black hole. With Hallowe’en departure minus a withdrawal agreement looking like a likely scenario, what could we expect from the Era of Johnson?
 
Recession depression:

A “no deal” Brexit is widely believed to lead to a deep recession among economists. It isn’t clear if it will be as bad as the latest global financial crisis (+6%), but it is feared that finances will weaken under this burden as jobs vanish. There will also be restrictions on the movements of people, regulatory standards and customs.

Arno Hantzsche and Garry Young of the National Institute of Economic and Social Research told the Associated Press in a July 2019 interview that with economic growth already faltering - “A disorderly ‘no-deal’ Brexit could cause widespread disruption to trade, a sharply lower exchange rate, higher inflation and lower living standards.”

This has caused uncertainty among business around how to plan for the coming years and have been restricting investments since 2016. Britain’s economy has been stuttering since then as recession seems ever more likely.
 
Shedding pounds:

Could the pound fall in value to just one US dollar for the first? With a “no deal” Brexit by October 31st, 2019, it may be likely if a recession stems from this, according to economic forecasts.

Virgin founder Sir Richard Branson went so far to say that the pound would see a devastating collapse under these circumstances. The British billionaire warned that his company would look to invest outside the UK, taking its roughly £100 million worth of European air freight contracts elsewhere. The pound has already hit its two-year low of $1.24.

Investors have spent the past few years preparing for aggressive swings in value for the pound. Analysts now say that it is trading at “crisis levels” where most of the present risk of a no-deal Brexit already built into its value. The FTSE surprisingly traded flat on Tuesday.
 
Cut the cheese:

Canada recently refused to extend its EU deal with the UK if there is no Brexit agreement, losing out on the deal’s benefits. This kybosh of the “roll over” with the Comprehensive Economic and Trade Agreement (CETA) would be a major blow to businesses that sell goods to the Canadian market.



Things haven’t progressed smoothly, as The PM's trade envoy to Canada, MP Andrew Percy, quit his post on Monday Jul 22nd over what he called “cack-handed planning”.

Dairy exporter Combe Castle told BBC News that this was a “disaster”. The company sees around a third of its business exporting cheese to Canada. Looking at the impact of no-deal tariffs on the rollover, have seen increases rising from 0% to 293% on some dairy goods. This sees a block of cheese worth around £500 ($817 CAD) in sales rise 245% to £1,200 ($1,961).
 
Change the Channel?

There remains a lot of uncertainty over what this means for the UK’s exporters and importers. Canada believes this could provide better terms for our producers selling into the British market than under a bilateral trade deal without any of the trade-offs.

Both ends of the English Channel will be strained under a “no deal” Brexit, but it seems likely that Britain will suffer more. British exports to the EU make up around 13% of the country’s annual GDP, versus 2.5% of the EU’s.

Johnson is walking into one of the most tumultuous times in the UK’s post-World War II history, where the UK sits deeply divided. The 2016 Brexit referendum only clawed away 52% of the vote. It also has implications reaching beyond capitalism to immigration, regional secession and the future of Britain versus the legacy of its empire.

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