Economic Takeaways from the Brexit Deal

Political tensions in Europe are flaring up again—this time over Brexit.

As shown in the LPL Chart of the Day, the British pound and the euro both dropped to the lowest levels since June 2017 after the U.K. government agreed last week on a proposed plan for the country to leave the European Union (EU). The EU-imposed deadline for the exit, or Brexit, is March 2019.

British Pound and Europe Drop to 1.5-Year Lows on Brexit Deal News

“Currency traders are bracing for a rocky evaluation process as both Parliament and the EU Council weigh in over the next month,” said LPL Chief Investment Strategist John Lynch. “Even though the U.K. is a small portion of the global economy, any outcome from this point complicates the macroeconomic environment worldwide.”

A hard Brexit, or the U.K. leaving the EU without the two parties reaching a deal, appears to be the worst-case scenario for U.K. and European economies. EU economies are still struggling with fiscal issues and tepid growth, even amid quantitative easing and structural reform. A no-deal Brexit would pose a swath of challenges in figuring out details of the arrangement, while a negotiated Brexit will likely have fewer unintended consequences. However, an easy path to Brexit may encourage other EU nations to follow suit. The EU is in a tough position right now, as it is trying to minimize economic disruption, while sending a message to other countries that an EU exit would be a difficult process. We see a hard Brexit as unlikely, as that outcome is not in anyone’s interest.

Markets are also watching the Brexit outcome for its potential impact on other populist movements. Successful pushback against British Prime Minister Theresa May’s compromise proposal may embolden populist movements elsewhere, although any subsequent adverse economic fallout would ultimately render the verdict negative.

On the surface, hiccups in the U.K.’s economy would have a negligible impact on global output, considering the U.K. comprises only 4% of global gross domestic product. However, global growth has been inconsistent at best in this post-financial crisis era, and any disruption to economic progress could be problematic. The U.K’s exit from the EU could also negatively impact global corporations as they adjust to new standards and rules.

Overall, recent Brexit developments haven’t changed our views. We remain cautious on Europe’s growth potential given political turmoil and tenuous economic conditions.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not bank/credit union obligations and are not endorsed, recommended, or guaranteed by any bank/credit union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA/SIPC

Tracking # 1-794520 (Exp. 11/19)