In the wake of the 2016 Brexit vote, many feared the United Kingdom’s economy would collapse into recession. In direct contrast, the United Kingdom has been one of the fastest-growing countries in the developed world over the past year, with an impressively low 4.5% unemployment rate.1
So the United Kingdom is out of the Brexit woods, right?
Unfortunately, the answer is no. The U.K. economy could certainly feel the effects if the country’s exit from the European Union (E.U.) eventually takes place in 2019.
Here are 4 possible Brexit scenarios:
- Crash Brexit: Economic uncertainty
Parliament fails to negotiate a deal and the United Kingdom leaves the E.U. without a backstop. The United Kingdom moves from E.U. rules to World Trade Organization rules. Increased economic uncertainty likely leads to a greater risk of recession.
- Hard Brexit: Current path
The United Kingdom leaves the E.U. single market and the customs union and reintroduces immigration control policies. Though public support splits on this issue, the current administration seems to favor this direction. The situation remains fluid, however, especially if the Conservative Party replaces Prime Minister Theresa May as its leader or another general election is called.
- Soft Brexit: Few changes
The United Kingdom joins the European Economic Area and retains access to the E.U. single market and customs union. After May lost support in the last election, this scenario seems more likely, but it wouldn’t change much about the country’s economic outlook, which runs counter to Brexit’s original intent.
- No Brexit: Change of course
Article 50 is revoked, Brexit never happens, and the United Kingdom remains part of the E.U.—an unlikely scenario based on the results of the 2016 referendum.
What happens next?
The United Kingdom and the E.U. have begun Brexit negotiations in Brussels. The United Kingdom’s negotiating stance is unclear given the hung parliament and wavering confidence in May’s leadership. However, the E.U. has spent the past year preparing for these meetings and has remained unified, at least publicly.
The United Kingdom may further clarify its position and negotiate a deal, but time is running out. The parties must reach a divorce settlement and a trade deal by October 2018 to allow time for U.K. parliament to review and approve the measures before the Article 50 clock strikes midnight on March 29, 2019, and the United Kingdom officially leaves the E.U.
What does this mean for you?
U.K. asset prices and the pound will likely fluctuate until the Brexit strategy and framework are in place.
To help minimize the risks associated with market volatility, you may want to consider a globally diversified portfolio to help hedge market declines in a single country or geographic region.
Vanguard’s low-cost diversification strategy is a core investing philosophy, Brexit or no Brexit.
1 Source: Macrobond as of March 2017.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.