Brexit to dominate UK’s political and business agendas in 2017

BPCC Brexit Brief No. 6: 2 January 2017

Six months on from the referendum and there’s still no real picture as to how Brexit will look. Politically, it does look more likely to happen, especially if Theresa May calls an early general election shortly after triggering Article 50 at the end of March. However, she will need a two-thirds majority in Parliament to do this (a provision of the Fixed-term Parliaments Act 2011). Given that the Conservatives have a mere 11-seat majority in the House of Commons, this may prove difficult. However, given the disarray that the opposition is currently in, it is very likely that the Conservatives would win an early general election, increasing their majority, and fighting on a ‘Brexit-means-Brexit’ platform. 

The nature of Brexit – hard or soft – is not something to be determined by the British government alone. If the EU wishes to punish the UK, a hard Brexit may be forced on Britain regardless of its wishes. In any case, there are many voices in the UK calling for hard Brexit – leaving the single market and customs union, such Leave Means Leave,  which would result in painful economic dislocation for Britain. Pragmatists offering a softer version of Brexit, akin to the Norwegian model, are finding it more difficult to explain why losing all influence in Brussels in exchange for being a part of the single market without being able to restrict freedom of movement is worth the bother.

Brexit discussion focuses on ‘transitional arrangements’ aimed at softening any eventual blows that decoupling the UK economy from that of continental Europe would entail. The financial services sector is calling for such arrangements, while proponents of a hard Brexit are urging the government to go for a ‘clean break’. 

In any case, many constitutional issues have yet to be resolved; the Supreme Court decision as to whether Parliament has a say in triggering Article 50; the role of the House of Lords in this matter; Scotland’s place in any post-Brexit settlement is likewise extremely unclear, with more discussion around the subject of a second independence referendum in the eventuality of a hard Brexit.

The issue of migration and the rights of EU migrant workers in the UK is also a focus of attention. Curbing their in-work benefits such as tax credits, currently being enjoyed, according to think tank Migration Observatory, by 318,000 EU citizens working in the UK, are being considered by the government. This is seen as a subsidy to employers who take on low-paid, long-term migrant workers knowing that they will be incentivised by generous tax-breaks from the government rather than by what the employer is willing to pay. 

The case of Monique Hawkins, a Dutch national with a UK husband and children who has lived in Britain for 24 years, came to media prominence last month. Wary of her post-Brexit status, she formally applied for UK residency as a first step towards UK citizenship. She was told by the Home Office to make arrangements to leave the country. Reason: she did not include her Dutch passport with the application, only a solicitor-verified photocopy (the process of applying for residency can take up to six months, and she could not submit the passport as she needed it to visit her elderly father in Holland.) The story shocked many of the 3 million EU citizens residing in the UK, especially those who’ve settled there and have no plans to move. But this case also highlighted the bureaucratic challenge that will face the government post-Brexit. Assuming the majority of the 3 million do wish to remain in the UK, they will all first have to fill out an 85-page form applying for permanent residency. The Home Office will need sufficient human resources to verify each and every application form. This will require thousands of extra people, with training, and – presumably – the physical ability to remove people from Britain who don’t meet the residency criteria.

In terms of UK-Polish trade, the latest GUS stats (Jan-Oct 2016) continue 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. ONS stats to end-October also show a slight rise in bilateral trade when expressed in sterling.

Macroeconomic indicators

UK unemployment remains at 4.8% in the three months to October, the lowest rate for over 11 years. Retail sales increased by 5.9% in the year to November.  Consumer price inflation rose slightly to 1,2% (from 0.9%) in the year to November. 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 Q3 growth was adjusted upwards to 0.6% quarter-on-quarter, slightly 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 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

The boost to the pound in the immediate aftermath of Donald Trump’s election has faded, though investors’ concerns about Poland’s political stability has similarly pushed down the value of the zloty. 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 2017, the pound has gained slightly on its early-October low, but is still some 10% down against the zloty compared to its pre-referendum level.

Against the dollar, the pound has slipped back since early November.

What to watch for

With the government setting itself an end-March deadline for triggering Article 50, watch out for statements from trade minister Liam Fox and Brexit minister David Davis that might give a clue as to the UK’s eventual negotiating position vis-à-vis the EU27. Crucial issues remain: access to single European market and customs union, passporting rights for UK financial services exporters, migration, EU citizens’ rights in the UK (and indeed UK citizens’ right in rest of EU), transitional arrangements, and any accommodation of Scotland’s desires to remain closer to the EU than England would like. 

Keywords brexit