White Paper ready for Brexit no.7

BPCC Brexit Brief No. 7: 2 February 2017

January has been a momentous month, events have moved forward at a rapid pace, more clarity has emerged – and yet business still doesn’t know as much about the final shape of Brexit as it would like to.

The Supreme Court ruled on 25 January that Parliament must have a say in triggering Article 50. And on Wednesday, Parliament voted, by more than four to one, to do just that. A date has been announced – 9 March. But there are still obstacles on the path.

The White Paper published yesterday sets out the UK government’s main negotiating points in the process of disengaging with the EU will be still have to be debated by MPs. And while Labour MPs voted overwhelmingly with the government to go ahead with Article 50, their leader Jeremy Corbyn has said that the details of the White Paper will have be argued one by one.

The European Union Bill now faces more debate before it can become law. MPs will discuss the bill in more detail next week when it reaches the committee stage in the Commons, where Labour promises to force through hundreds of amendments. The objectives set out in the government's strategy expected to attract more.

[Full text of the White Paper here]

Hard Brexit – now re-named ‘clean Brexit’ by the government – still leaves fundamental questions as to the exact nature of the Britain’s trading relationship with the EU after it leaves, and as to the precise nature of transitional arrangements. At this stage, it looks like the UK government is looking for something resembling the Swiss model.

Brexiteers are pulling in two opposite directions. Some want to see the UK restored to a global leader in free trade, unrestrained by Brussels bureaucracy, able to attract the brightest and best from around the world. Such a liberal UK would be able to be a global Hong Kong, with low rates of corporate tax in the spirit of Adam Smith.

But others offer a different vision; they want to pull up the drawbridge on migration and globalisation, retreating from world affairs, shielding local businesses and workers from foreign competition. The latter voices are more grass roots, the former being closer to the official government line.

The big question will still be how much the EU is prepared to yield to the UK in terms of access to the single market given the UK’s insistence on ending free movement on labour. There is all to play for in the negotiations that will begin immediately once Article 50 is triggered. While the UK government is steeling itself for tough talks, the key factor is the EU’s resolve – to what extent will it want to be seen to punish the UK to discourage other member states from thinking that they too can leave and then be rewarded with lenient treatment.

Theresa May’s visit to the White House shows the importance the British government attaches to securing an early trade deal with the US.

TRADE AND MACROECONOMIC DATA

Value of UK-Polish trade in goods, Jan-Nov 2016; all currencies in billions

Although methodologies vary, the huge rise in bilateral trade when expressed in sterling is to a large degree the result of the pound’s drop in value against most currencies after the referendum. However, the UK’s Office of National Statistics shows the value UK exports to Poland growing faster than Polish exports to the UK, while the Polish statistical office GUS shows (in three different currencies) the value of Polish exports to the UK growing faster (or declining at a slower rate) than British exports to Poland. By the middle of this month, we should have the preliminary results for the whole of 2016 from both countries’ statistical offices.

Macroeconomic indicators

Proponents of Brexit point out that pre-referendum fears about the economy going into recession in the event of a ‘Leave’ vote proved totally unfounded. But ‘Remainers’ point out that the UK is still in the EU, and the dangerous moment for the economy will be after the UK leaves the EU – especially should a comprehensive trade deal (which includes services) not be in place in time.

UK unemployment remains at 4.8% in the three months to November, the lowest rate for over 11 years. Retail sales increased by 4.3% in the year to December. Inflation continues to rise, as the post-referendum fall in the pound affects import prices, which are being passed onto consumers. The CPI stands at 1.6% in the year to December (up from 1.2% in November and 0.9% in October). The Bank of England, having cut base rates to a historically low 0.25% to boost to economic demand, did not make the expected 15 basis-point cut to 0.1% in November.

GDP growth for Q4 growth was adjusted upwards to 0.6% quarter-on-quarter, the same as in Q3. The UK economy grew by 2.2% in the year to the end of Q4, and by 2.0% for the whole of 2016. This, plus the slightly stronger pound (see below) suggests the UK’s economy is still larger than that of France (after dipping below it earlier in the autumn).

Currency markets

Global investors’ concerns about political stability around the world has resulted in increased volatility in foreign exchange markets. The pound bounced back from its early-October low against the zloty of (4.69) as investors tended to see more upside and stability in sterling. The pound/zloty coupling was further affected by news of Poland’s weaker than expected Q3 GDP growth figures, which depressed the  zloty against all major currencies. At the beginning of February 2017, the pound has gained on its early-October low (4.69 zł), but is still some 13% down against the zloty compared to its pre-referendum level. At the time of writing it is almost exactly 5.00zł

Against the dollar, the pound has been gaining ground since mid-January; the Trump administration’s desire to talk down the value of the dollar, to make it more competitive globally, has led to the pound’s strengthing towards $1.27 from $1.20 – a strong upward tendency unseen since the referendum.  

What to watch for; further reading.

The publication of the government’s white paper is unlikely to produce any great surprises, with most commentators expecting it to follow the outline set out by Theresa May in her speech to EU ambassadors to London at Lancaster House on 17 January [full transcript here]. More insights from Mrs May followed in her speech to the World Economic Forum on 19 January [full transcript here].

Keywords brexit