While he noted there will be knock-on effects from any UK downturn in trade with continental Europe, he argued that these will be limited by the fact that UK trading forms only a small part of continental European gross domestic product.
Gallagher sees Brexit as “an asymmetric shock with the UK at the centre.”
“Continental European businesses may also behave more cautiously in their investment decision making due to higher levels of uncertainty, but we think these will be materially less than any uncertainty issues evident in UK business investment decision making over the next while,” he explained.
He does not claim that Europe has no concerns on the economic front however, but argues that these are well understood already.
“There are of course still issues to work through in the continental European economies, such as the state of the Italian banking system, but this does not represent a change per se in what we already knew,” Gallagher said.
“Unless something goes dramatically wrong in continental Europe from here, we think this is primarily a UK issue and that has definite implications for how we approach our investments. The factors that we will have to monitor are: when does the UK activate Article 50[1] and, indeed who has the power to do it?; how pragmatic will the prime minister be in their negotiating stance?; and what is the reaction of the broad policymaking establishment in the EU-27 and what negotiating stance do they take?”
Gallagher added that GAM believes the key long-term trade-off for the UK may come down to single market access versus freedom of movement of people. While sympathetic to the idea that UK businesses should seek longer-term opportunities outside of Europe in the faster growing parts of the world, the firm believes that exiting the single market without a trade agreement in place would be negative to the UK’s economic prospects for at least a few years and constitutes an act of “self-imposed economic harm.”
