top of page

Brexit's Impact on the UK Economy: What to Expect in 2021

As the dust settles after the UK's departure from the European Union's single market and customs union, the country is starting to experience the negative economic consequences. Several indicators reveal the initial impact, with the UK economy expected to shrink by approximately 1% this quarter, according to Gita Gopinath, the chief economist of the International Monetary Fund (IMF).

In 2020, the IMF downgraded the UK's economic performance, estimating a 10% decline in gross domestic product (GDP). Recent surveys conducted by data company IHS Markit indicate severe disruptions in the supply chains of UK manufacturers and service providers. These disruptions can be attributed to both Brexit-related issues and a significant shortage of international shipping availability.

Freight volumes between the UK and the rest of Europe have already seen a decline of 38% in the third week of January compared to the previous year. The traffic of goods on UK-European Union routes is particularly affected by paperwork, higher costs, and compliance delays. Trade between Britain and Northern Ireland, which remains in the single market, also faces more severe challenges.

The Office for Budget Responsibility, the official fiscal watchdog, predicted a long-term shrinkage of the UK economy by 4% due to Brexit, even with the free trade agreement signed between the two sides just before Christmas.

The uncertainty surrounding Brexit has created a sense of unpredictability in the markets. While markets typically dislike uncertainty, the UK's entry into uncharted trading waters adds further complexity. The UK government has already indicated that disruptions for businesses and individuals are likely to occur in the new relationship with its European counterparts.

The immediate aftermath of Brexit exit will impact various sectors differently. Industries such as financial services, farming, manufacturing, and VAT compliance will face significant changes, including additional red tape and complexities associated with selling in the EU. The service sector, which accounts for 80% of the UK economy, has received limited attention and details in the initial agreement.

Financial services, in particular, have been acknowledged by Boris Johnson, the UK Prime Minister, as not fully meeting the desired outcomes. This sector, crucial to the UK economy, has remained relatively vague in the trade deal. Analysts have expressed mixed views on the impact on Sterling, the FTSE100, and the overall economy. Day traders will be closely monitoring and seizing opportunities arising from positive or negative market commentary.

While a comprehensive list of changes due to Brexit exists, the impact on the service sector remains uncertain. The European Union has historically envied the UK's financial services influence, raising questions about potential repercussions in this area. Following the announcement of the trade deal, UK bank shares experienced significant drops, with Lloyds suffering a near-4% decline. The absence of financial services equivalence in the Brexit deal has contributed to this decline.

Other sectors that may be adversely affected include pharmaceuticals, automotive manufacturing, and airlines. UK-based airlines will need to reconsider their European routes, considering EU laws, regulations, and visa costs. EasyJet, for example, experienced a 20% drop in share price after the Brexit vote four years ago.

All four sectors mentioned above will rely on maintaining strong relations with the EU and its member states to sustain stable trade deals with European countries. However, achieving this will not be an easy task. Compliance with individual countries' regulations rather than a unified set of rules for the entire EU presents an additional challenge.

Prime Minister Boris Johnson has referred to the incidents and trade disruptions triggered by Brexit as "teething problems." However, many anticipate the government to take action and mitigate the consequences, considering the impact of the COVID-19 pandemic. While the pandemic may temporarily overshadow Brexit's effects, it remains unclear how the government will be able to fully mitigate the consequences of being an outsider to the single market without taking steps towards the EU and engaging in further discussions.

The outlook for the future remains uncertain. The question of whether Sterling will decline or surge is a matter of speculation. Traders, particularly those involved in Contract for Difference (CFD) trading, can try to profit from both positive and negative price fluctuations by taking long or short positions on the Sterling. However, it's important to note that accurately predicting market movements is challenging, and it's advisable to stay informed by following reliable news sources such as Reuters and BBC.

For those new to trading, it's essential to gather information and educate oneself about the intricacies of the market. Exploring reputable trading platforms and resources can provide valuable insights and guidance.

As Brexit continues to unfold, it's crucial for businesses and individuals to stay updated on the latest developments and adapt to the changing landscape. While there may be challenges in the short term, there may also be opportunities for growth and innovation in various sectors. Keeping a watchful eye on market trends, economic indicators, and governmental actions will help navigate the complexities of the post-Brexit era.

It's important to remember that the long-term effects of Brexit are still unfolding. The economic impact may become more apparent as time progresses, and it will be necessary to assess the government's response and its potential impact on trade and market stability.

In conclusion, Brexit has ushered in a new era for the UK economy, characterised by uncertainty and change. The initial indicators already show negative consequences, but the full extent of its impact is yet to be seen. As the UK adjusts to its new relationship with the EU, businesses, traders, and individuals should stay informed, remain adaptable, and seek opportunities amidst the volatility and challenges that lie ahead.

bottom of page