29 Mar 2017
After nearly half a century of matrimony, the UK has made it official — so long EU, hello world. Seeking to be a free agent unencumbered by the need to compromise or "harmonise" the Government has acted decisively to pursue the will of its people.
Watch my economics summary of this significant event (1m 30s)
Sovereignty and immigration were irreconcilable differences, but the desire to maintain a less unitary relationship remains. Akin to a civil union seeking the benefits of marriage with none of its legal obligations, the UK faces a challenging road ahead in defining its future relationship with Europe.
The triggering of Article 50 is nothing more than a formality of what has already been announced under various iterations over the past month. In this regard, the Government’s strategy has been to reduce negative financial market reaction through forward guidance. How negotiations move beyond rhetoric such as “no deal is better than a bad deal” remain to be seen, but for the moment all options remain available. The alternatives fall under five broad categories:
- Join the European Economic Area eg Norway
- Form a bilateral agreement eg Switzerland
- Customs union eg Turkey
- Free trade agreement eg South Africa
- Default to most favoured nation terms under the World Trade Organisation
Transparency is crucial
Transparency during the two-year negotiation process will be crucial in reducing uncertainty and market volatility. Open access to international trade, capital and labour markets are vital in securing a prominent role for the UK on the global stage. Business planning in areas such as capital expenditure and hiring will be dependent on a clear and stable framework of timelines and outcomes. Transitional arrangements may be particularly helpful in this regard as the unwinding of such an integrated relationship will unlikely be straightforward.
The tailwinds of strong consumer spending since the referendum was passed last June are likely to fade in 2017. Lacklustre growth in nominal wages coupled with materially higher inflation will crimp the ability of households to spend further; saving rates are already near all-time lows and there are limits to higher levels of unsecured borrowing. By the end of this decade, fiscal policy is set to meaningfully tighten and monetary policy will need to normalise at some point if it is to remain an effective tool at addressing the next economic downturn. These challenges are in addition to those presented by Brexit, which makes an orderly outcome of the negotiations even more imperative.
Decisive and predictable action needed
In change lies opportunity, and that is what a majority of British voters expressed for their future. Whilst securing the best deal possible for the UK should be a priority, ensuring that a mutually productive relationship with the EU ensues is of comparable merit. If the UK is to remain relevant in a more globally integrated economy and enhance its competitiveness, it would do well to act decisively and predictably. In steering the country through these unchartered waters, Theresa May has the potential to redefine the pre-eminence of London and the UK as a global centre of innovation and excellence.
Watch: Economics summary (1m 30s)
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