Time to get Brexit done

A clear way ahead?

The overwhelming success of the Conservative Party in the 2019 General Election should ensure that the UK quickly moves to leave the European Union (EU) through signing the Withdrawal Agreement. The early reaction of financial markets has been very positive, with the pound rising and the FTSE up on opening. However, much remains to be done.

Details, details, details…

Despite the claims on the campaign trail, while the Withdrawal Agreement confirms that the UK will leave the EU, it leaves many of the details, especially around future trade relations, to be agreed. After the initial euphoria subsides, it is likely the pound will fall back as financial markets recognise that the risk of a No Deal remains. Time is short - under the Withdrawal Agreement, the UK must ask for an extension to the December end date by July 2020. All the evidence is that trade deals take longer than six months to negotiate and a deal involving the EU will probably take even longer to ratify, as all 27 member states and some regional governments have to pass it.

,,, could mean more of the same…

The UK will still face uncertainty on its future trade relationship with the EU and other issues such as immigration, and this means that there is unlikely to be any significant change in the economic outlook in the first half of 2020. UK business investment has fallen in five of the last six quarters and there is unlikely to be any significant acceleration while uncertainty remains and there is little sign of any upturn in the global economy. There may be a short-term uptick in consumer spending, but this is likely to be short-lived without a corresponding business recovery.

…though there is hope…

The new Government won a large majority which should allow the Prime Minister to stamp his mark on the negotiations with the EU. He will be exposed to the influence of any one faction in his party, leaders with large majorities do have the power to choose. If he was willing to override his manifesto commitment and extend the negotiating period, then the chances of negotiating a trade deal and avoiding No Deal would increase. In this scenario, business and consumer confidence could strengthen leading to faster growth.

…but challenges remain…

Even if the Prime Minister can create the space to negotiate a free trade deal that most trade specialists believe will take longer than 12 months to ratify, the impact on the economy is unknown. The clear indications are that the agreement will be on the lines of the EU-Canada FTA, albeit with an ambition to go further than that deal. It does appear that this will mean the UK in future will be outside of both the Single Market and the Customs Union.

In this scenario, the impact on the UK economy is likely to vary both by sector and geography. Much will hinge on the details of any future customs arrangements. Tariffs capture the headlines, but the processes around customs are critical in defining the efficiency of supply chains.

…and many questions…

The Institute for Fiscal Studies identified the relatively thin nature of the Conservative Manifesto. As a result, it is difficult to form a view on the policy programme as even high-profile policies such as Gigabit Broadband were not fully articulated. Policy is likely to evolve in part in reaction to progress on the trade deal – the greater the potential downside on trade, the more we can expect increased public spending. Under all scenarios, businesses should expect increased Government intervention, the Prime Minister floated changes to State Aid during the campaign.

…so remain vigilant.

After a brief honeymoon, businesses can expect to find themselves facing further uncertainty as the details of the UK’s future relationship with the EU are negotiated. Staying close to the news on the negotiations and on Government policy announcements, it is likely there will be a Budget soon in the New Year. In the absence of other data, continuing to watch the labour market for signs of a fall in employment or a slowing of wage growth, both of which would indicate the risk of lower growth, is the most readily available indicator.