United Kingdom Politics October 2016

United Kingdom

United Kingdom: Theresa May sheds light on Brexit timeline

Following nearly four months of little or no news regarding formal negotiations with the European Union, in early October, Prime Minister Theresa May finally shed some light on the Brexit timeline and announced that Article 50 of the Lisbon Treaty will likely be triggered before the end of March 2017. May also announced plans for a “great repeal bill”—a law that intends to remove all European laws from the British statute book on the day of exit. The speech gave indications that the UK is heading for a “hard” Brexit, which would broadly mean no-tariff free access to the European market and restrictions on labor movement. May’s intended timing of the start of the two-year negotiation period to leave the EU means that the UK might be out of the Union just before the next general elections in 2019, though the negotiation process could well last longer than two years.

Growth continues to hold up well in the UK despite the unfavorable referendum outcome, but the uncertainty regarding the medium- to long-term effects of Brexit is expected to adversely affect investment and firms’ appetite for hiring new workers. On 11 October, the pound hit historical low levels and traded at GBP 1.21 per USD (1.10 per EUR), thus losing over 5.0% of its value on a monthly basis against both the euro and the greenback. The steep depreciation, which was primarily due to escalating concerns of a severe separation from the EU, boosted FTSE 100 as many companies that compose the stock index generate their revenues abroad. The currency recovered somewhat on 18 October following the news that the final deal with the EU will be subject to parliamentary approval, but it still remains weak compared to pre-Brexit levels.

The depreciated GBP will increase inflationary pressures going forward due to higher prices of imports. On the flip side, the weaker pound should help exporting companies boost their activity and support the tourism sector, and it should not be a threat to private consumption as long as wages grow faster than inflation.

James Knightley, Senior Economist at ING comments that despite higher inflation, there is space for additional stimulus: “Recent data flow has made a November rate cut look less likely, but will still expect a move within the next six months. Sterling is also likely to weaken further and we also expect to see some fiscal stimulus at the 23 November Autumn Budget Statement, which will be presented by Chancellor Phillip Hammond. This will likely focus on infrastructure projects that will support economic activity over the medium to longer term.”

Adding to the domestic turmoil within the UK, the Scottish government recently presented a draft bill for a second independence referendum. The Scottish National Party claims that the prospects of a pro-EU Scotland being separated from the European Union against its will validates a new independence referendum, though recent opinion polls suggest that there has not been a major change in independence sentiment among the Scots.

GDP growth is expected to decelerate markedly both this year and next amid a backdrop of low business sentiment, a significantly weaker currency and a deteriorating outlook for the labor market. The sharp cut in the UK’s GDP forecast after the referendum triggered an abrupt policy response from the government and the Central Bank, aiming at offsetting the adverse effect of Brexit uncertainty on the economy. This month, FocusEconomics’ panelists have upgraded their GDP forecast for 2016 and the Consensus Forecast now foresees 1.7% growth—up 0.1 percentage points from last month’s estimate. The Consensus Forecast shows GDP expanding 0.5% in 2017, which is unchanged from last month’s estimate.


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