UK: Brexit drives investment climate - BBH

In view of Marc Chandler, Global Head of Currency Strategy at BBH, the UK economy is likely to sustain growth near the 2017 pace of around 1.5% year-over-year and price pressures should ease, and this will bolster the purchasing power of households, which has been eroded by the decline in real wages. More than macroeconomic variables, however, Brexit may drive the investment climate, he further adds.

Key Quotes

“Nine months after triggering Article 50, the UK seems woefully unprepared. The Chancellor of the Exchequer acknowledged that there had not been the formal cabinet discussion of a post-Brexit trade relationship that is desired. The Brexit Secretary admitted that there were no quantitative studies conducted on the cost of Brexit, nor was there industry impact research.”

“It took more than a third of the two-year time limit to address three issues:  its financial obligations, the right of EU citizens in the UK after Brexit, and the Irish border. Even now, the judgment that sufficient progress has been made for talks to proceed to the next stage does not mean that they have been resolved. One of the most vexing issues is where to locate the hard border for customs and passport checks when the UK leaves the single market.”

“The EU and Ireland insist that the border cannot be between the Republic of Ireland and Northern Ireland. The Democratic Unionist Party, which gives May her parliamentary majority, will not accept a hard border between the UK and Northern Ireland.  The UK’s promise of “regulatory equivalence” may be sufficient for talks to progress, but they cannot end there.” 

“Given the numerous authorities that must approve the new agreement, the EU is aiming to complete the second stage of negotiations, which will focus on the new trade relationship and transition period, by the end of October 2018. The hard end date is March 31, 2019, two years after Article 50 was triggered. The EU appears to seek a trade agreement with the UK similar to the one that was struck with Canada in 2017 after several years of negotiating, which nearly failed to be approved unanimously as required. Talks of a new trade agreement between the UK and EU are unlikely to begin until the March 2018 summit. The first part of next year will likely be spent discussing the transition period that the UK seeks.”

“Former Prime Minister Cameron promised the non-binding referendum on EU membership as a way to heal the fissure within the Tory Party. Not only did he make the referendum binding, committing the UK to a momentous decision on a 52%-48% vote, but the Tory Party remains profoundly divided. The divide would be difficult for even the most adroit leader to navigate. The bookmakers put even odds on May remaining at 10 Downing Street a year out. May’s Tory Party rivals recognize that the near-impossible must be delivered, and Labour is running ahead in the polls for the first time in years.”