The High Court ruled on 3 November that Parliament must vote on whether the UK can start the process of leaving the EU. This means the government cannot trigger Article 50 of the Lisbon Treaty - beginning formal discussions with the EU - on its own. Premier Theresa May says the Brexit referendum and ministerial powers mean MPs do not need to vote on triggering Article 50, but the High Court has ruled that this is unconstitutional. The government will appeal this ruling in the Supreme Court.
Four months after the referendum, and the economy has taken over from migration as the government’s primary concern. What was in essence a protest vote over migration has turned into a project where the focus is increasingly on ensuring that the economic costs of decoupling from the single European market do not turn out to be too great.
There was some cheer that the UK economy grew 0.5% from the second to the third quarter of 2016, driven mainly by consumer spending.
Nissan’s decision keep production lines for its new Qashqai and X-Trail models in Sunderland was portrayed as a vote of confidence in the UK, although critics asked why the government shared its Brexit strategy with a foreign investor, but not with MPs. A further legacy of this decision may be that other foreign investors may ask for similar packages.
Uncertainty remains about two crucial issues – the chance of the UK’s financial services sector to retain ‘passporting rights’ to sell directly to consumers in continental Europe after Brexit, and the likelihood of a transitional arrangement to remain within the Customs Union in the immediate period after Brexit.
Discussions around migration are also beginning to take shape. The HR needs of business focus on categorising migrants by skill and duration of stay. The category of ‘low skill, long duration’ will be subject to the greatest restriction. It is here, in jobs in factories, warehouses and horeca, where native Brits could theoretically take up employment, that employers can expect the greatest changes. Restricting the flow of migrants into low-skilled, short-duration jobs, seasonal work in agriculture and horticulture will hit the UK economy, retailers and their supply chains, and will have an inflationary effect; it is possible that EU migrants will be allowed to work in the UK in these sectors on a seasonal basis only. High-skilled migrants from the EU are unlikely to face any great impediments to recruitment post-Brexit.
The announcement by Mark Carney, Governor of the Bank of England, that he will quit his job in November 2017, three years before the end of his contract, highlighted the strains that exist between the government and the independent central bank. Mr Carney has not shied away from criticising Brexit and its potential macroeconomic impact.
The finalising of the CETA free-trade treaty with Canada, despite reservations from Wallonia, creates a precedent for an eventual UK-EU trade deal, although it must be stressed that it took seven years to sign the agreement with Canada, and that Canada had a team of 500 trade policy experts working on this (the UK’s Department of International Trade, by contrast, intends to have 140 trade policy staff in place by the end of this year – to cover all global trade negotiations).
Leaving the single European market and the effect on UK-Polish trade and investment
While the UK ran up a trade deficit in goods of £125 billion trade deficit in goods last year, its trade surplus in services was £90 billion, which kept the overall trade deficit down to a relatively manageable £35 billion. Post-Brexit, it is likely to become harder for the UK to export services to the EU. And at the same time, the UK will be paying more for imported goods, given the depreciation of sterling. This will mean an increase in the UK’s balance of payments deficit.
Foreign capital, which has been flocking to the UK for decades, seeing the country as a great platform for manufacturing within the EU, may not be sufficiently attracted by the UK simply to serve the UK market. So if there’s to be import substitution on the kind of scale that would have an impact on the UK’s balance of payments, it will be down to domestic capital to invest in it. But will any investor risk their capital in a manufacturing venture to service a market of just 65 million (as opposed to 440m consumers across the remaining EU member states) – with exports subject to an average of 10% import duties in their destination markets?
The likelihood is that the UK will continue sucking in imported goods, even with tariff barriers are in place. Weak pound + tariffs = more expensive imports and inflation kicking off.
What does this mean for Polish firms looking selling to the UK after Brexit? Their cost-base will remain competitive in relation to western European economies. The weak pound and the new tariffs will hit all exporters, but those with the highest cost base may find their products are no longer affordable by British consumers. Polish exporters may have an opportunity here.
Looking the other way, a weaker pound that will probably cancel out price rises caused by tariffs, a rapidly rising GDP and ever-wealthier consumers mean that Poland should be seen as a priority export market for UK manufacturers.
The impact of the 23 June referendum on UK-Polish trade: looking at the Polish stats it is now apparent that the UK has lost its status as Poland’s second-biggest export market – it’s now Czechia. But the UK’s Office of National Statistics shows that the past three months (June, July and August 2016) saw the best performance in terms of value of UK exports of goods to Poland ever (excluding one-off trades in oil).
Financial services and Brexit
Over 5,500 UK financial services institutions currently benefit from the ‘passporting’ regime that gives them access to the EU market – but then more than 8,000 financial services institutions from mainland Europe use passporting to access consumers in the UK. Discussions about the future of financial services post-Brexit are low-key. Many foreign-owned financial services institutions based in the City of London are actively or passively considering to move all or some of their EU/EMEA HQ operations to mainland Europe; asset managers being more mobile than banks from the point of both physical presence and regulatory issues. Many back-office activities could be outsourced to Poland, amplifying a trend that’s been visible for the past few years.
UK unemployment remained at 4.9%)in the three months to August, and retail sales increased by 4.1% in the year to September (down from 6.2% in the year to August). Consumer price inflation surged to 1.0% in the year to September, as expected. The Bank of England, having cut base rates to a historically low 0.25% to boost to economic demand, is expected to make a further 15 basis-point cut to 0.1% in November. Whether this tiny cut will have any further effect on consumer spending or business investment is a moot point.
The markets remain twitchy, reacting to news and rumours concerning the shape of Brexit, the early-October low of 4.69 zlotys to the pound being a reaction to intimations that a hard Brexit is now the more likely outcome. But once that news had been digested, the pound bounced back a bit against most currencies. Usual macroeconomic factors that affect the currency markets such as GDP forecasts or interest rate movements are now joined by Brexit-related tidings.
It is therefore highly probable that sterling will continue to fluctuate with a greater amplitude than has been observed over the past four or five years. This will not help trading and investment decisions.