Our Opinion: 2017

Sufficient process takes Brexit to the next step


Last week was tumultuous for the UK’s Prime Minister. It began with Theresa May being close to agreeing a deal with the EU on the terms of the UK’s “divorce,” only to have the rug pulled from under her by the Northern Irish Democratic Unionist Party, the political ally she relies on for a majority in the House of Commons. However, it ended with an agreement that satisfies all parties. This accord makes Jean-Claude Juncker, the European Commission President, confident enough to recommend to the heads of state of the remaining 27 countries in the EU that sufficient progress has been made on phase one of the negotiations.

Of course, it is not yet a done deal. There is no guarantee that all of the Heads of State will agree to this recommendation, although the chances of them going against the guidance of Juncker and Michel Barnier are fairly small. At home, the UK prime minister is likely to come under intense scrutiny from the pro-Brexit elements of her party. However, the initial reaction has been supportive, and it is likely that most will fall into line as they focus on their bigger goal of leaving the European Union.

Negotiations are likely to move to phase two – transition and trade – soon after this week’s European Council meeting. This should ease some investor concerns about UK economic growth outlook, opening the way for a higher Pound.

The 15-page document published jointly by the European Union’s and the UK Government’s negotiators contains a lot of specific details about the UK withdrawal agreement. Much is also left open to interpretation, which can only be expected in any set of negotiations. Still, the important point is that the European Commission President and the chief negotiator feel that sufficient progress has been made to recommend to the EU27 that the talks can be moved onto phase two.

Be in no doubt. The hard work for the UK and the EU lies ahead.

Agreement on a transition arrangement should be relatively easy, especially as this is likely to be time-limited. A condition of this transition deal will likely be that the UK remains under the jurisdiction of the European Court of Justice, subject to EU regulations. Nevertheless, as the Chancellor of the Exchequer admitted recently, there is still no agreement among the UK cabinet on what it wants from a final deal. Apparently, this will be agreed before the year draws to a close, but it is unlikely that this will be an easy feat for the PM.

Moreover, expectations of what the UK will likely seek from a future deal – often described as a “bold and ambitious” trade relationship by the PM – may well fall on deaf ears in Brussels.

What is clear is that the future UK trade relationship with the EU will be less favourable than it is today. As a non-member it clearly has to be. But whether or not the UK can achieve something superior to the recently negotiated EU-Canada trade deal will be a matter of long, and no doubt fraught, negotiations.

Tough times ahead, but we also mustn’t lose sight of the fact that with every challenge comes opportunities. If the UK government uses its new found freedoms to negotiate deals outside the EU, and set domestic policy in a way that supports the UK’s economic ambitions, then there is every chance that the UK can prosper outside of the EU.

Another factor that might help ease some of the uncertainty hanging over the UK is the position of the prime minister. Dogged by infighting in her own party, whilst trying to negotiate with the EU, her position had been a weak one. Nevertheless, the success achieved in this first phase of talks has probably strengthened the PM’s standing somewhat. It is said that “a week is a long time in politics.” But it seems that the threat to her leadership has also faded, reducing the likelihood of a general election in the next 12 months.

With the negotiations evolving, feels as if the risks to growth are shifting to the upside, alongside the chances of another UK rate hike in the next 12 months.

A falling pound proved a boon for the UK equity market following the EU referendum. Some 15 months later, we are witnessing the reverse effects. Taking into account the stronger earnings momentum in Europe against the UK, the recent underperformance of UK equities could continue.


11th December 2017