Brexit centre stage in Autumn Statement no. 5

BPCC Brexit Brief No. 5: 5 December 2016

Britain awaits the Supreme Court’s ruling on the government appeal against the High Court’s verdict that Parliament must vote on whether the UK can start the process of leaving the EU. The hearing begins on 6 December and the ruling is expected in January. Premier Theresa May has said that should the Supreme Court uphold the High Court’s decision, she will challenge MPs and Lords “to defy the will of the people” on Brexit.

On 23 November, Philip Hammond made his first Autumn Statement as Chancellor of the Exchequer, the first major fiscal pronouncement by the government in the wake of the referendum. Britain’s fiscal watchdog, the Office of Budget Responsibilities, stated that the UK economy will grow by 2.4 percentage points less than its pre-referendum forecast. This means the government needs to borrow £122 billion more, putting a stop to plans by Mr Hammond’s predecessor George Osborne to balance the books by 2019. Instead, public sector net borrowing will persist until beyond 2021.

The OBR’s forecast was criticised by Leavers and Remainers alike for not taking into account what sort of Brexit Britain is going to have. A hard Brexit – leaving the European single market – is likely to be far more painful for Britain’s finances than a soft Brexit which would see the UK continuing to have preferential access to the EU’s markets.

Pronouncements by different government ministers (foreign secretary Boris Johnson, Brexit minister David Davis, trade minister Liam Fox and Mr Hammond himself) continue to broadcast often inconsistant messages as to what sort of Brexit the UK is likely to have.

Meanwhile on the continent, responses among leaders of the 27 other EU member states are similarly mixed. The visit last week to London of the Polish premier Beata Szydło (accompanied by a team of senior ministers) suggests that Theresa May is looking to build bridges with individual member states ahead of the formal triggering of Article 50. But at the heart of the 27’s response to the UK is the issue of Freedom of Movement, one of the four freedoms set out in the Treaty of Rome, the EU’s founding document. If Britain persists in wishing to curb EU migration, it will find it close to impossible to maintain privileged access to the single market.

Article 50 foresees a period of two years for the negotiations to extricate the UK from the mechanisms and institutions of the EU. Yet it is unlikely that during that period a comprehensive trade deal can be closed between the UK and the 27. Last week’s conference of the Confederation of British Industry made it clear that British business cannot afford a situation whereby WTO-style tariffs are imposed on two-way trade as an interim measure (the default position in the absence of a negotiated trade treaty). Given the five years it took to hammer out the Comprehensive Economic and Trade Agreement with Canada, it is likely that the interim tariff regime will be in place for a long time after the end of the two-year Article 50 deadline.

This is causing anxiety among businesses in the UK, in particular foreign investors. Uncertainty remains the dominant emotion among investors, although there are sectors which are seeing business as usual, in particular IT.

In terms of UK-Polish trade, the latest GUS stats show a slight increase in both directions in zloty terms, but a slight fall in both directions when the values are expressed in euros and dollars.

Questions the British government has yet to answer

These are the issues that will be the subject of negotiation once Article 50 is triggered.

  • Will the UK remain in the European Economic Area?

  • Will the UK remain in the Customs Union?

  • Will the UK’s financial services sector retain its passporting rights?

And how does the British government intend to square its determination to leave the EU with the fact that more Scots voted to stay in the EU(62%)  than to remain within the UK (55%).

Macroeconomic indicators

UK unemployment fell to 4.8% in the three months to September, the lowest rate for over 11 years. and retail sales increased by 7.4% in the year to October (the highest rate of growth for over 14 years).  Consumer price inflation fell back slightly to 0.9% (from 1.0%) in the year to 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. Although GDP is still growing, Q3 growth (at 0.5% quarter-on-quarter) is down on Q2’s 0.7% growth. The UK economy grew by 2.3% in the year to the end of Q3. This, plus the 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

The unexpected victory of Donald Trump in the US presidential election had the side-effect of boosting the pound. It 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 December 2016, the pound has made up more than half of its fall to early October, but is still some 8% down on pre-referendum level.

Against the dollar, the pound has also gained, but not as much, suggesting less volatility in the pound/US dollar coupling.

Richmond Park – twice no to Brexit

Pro-Brexit Conservative MP for Richmond Park, Zac Goldsmith, resigned from his seat in protest against government plans to build a third runway at Heathrow Airport. He triggered a by-election, standing as an Independent candidate, to fight the expansion of the airport (the constituency lies under the flight-path). He lost, turning a 23,000 majority in last year’s general election into a defeat by 2,000 votes to Liberal Democrat Sarah Olney. The by-election was seen as being less about Heathrow than a protest vote against Brexit. (Richmond was 70% for Remain in the referendum. Mr Goldsmith also lost the London mayoral race against pro-Remain candidate Saddiq Khan.) Voters in London are clearly against hard Brexit.

Keywords brexit