Some nine months since the vote, we are gradually gaining a little clarity about the nature of Brexit, says Square Mile.
- Brexit presents formidable challenges: There are significant gaps between the EU and the UK positions.
- The most contentious issues are the powers of the European Court of Justice and the free movement of labour
- There is no road map, which suggests a degree of caution is appropriate.
Despite court challenges, May's government triggered Article 50 in March and the process is formally underway. There are number of large stumbling blocks between the EU and the UK positions. As Juncker is reported as saying to Merkel over the weekend, May is 'living in a different galaxy' and that he is now "ten times more sceptical than before".
“May would like free trade without uncontrolled immigration, the EU would not.”
The two main contentious issues are the powers of the European Court of Justice and the free movement of labour. There may be some sort of compromise possible on the former, but the latter appears intractable. May would like free trade without uncontrolled immigration, the EU would not. The UK as a result seems destined to leave the single market and take a clean break from Europe. In May's words, "No deal is better than a bad deal". A diamond tipped hard Brexit seems to be the likely outcome.
The economy so far has been little affected thanks to a rare real pay increase for the average worker during 2016. This year will be a harder one for the consumer as inflation rebounds; wages will struggle to keep pace. In its forecasts, the OBR has delayed the timing of the expected Brexit slowdown by a year or so but remains broadly consistent in its expectations of the magnitude. On the other hand, the likes of Neil Woodford take the view that the impact will be of minor significance.
We of course have no real idea and although most economists are expecting some sort of negative effect, these are little more than calculated guesses. There is no road map, which suggests a degree of caution is appropriate. In the equity space, we are largely there already as our current equity underweight is largely accommodated via the UK. We expect further disturbing rumours/announcements to be made over the coming months as the negotiations get underway, some of these will undoubtedly unsettle UK financial markets.
This is an article posted by Jason Broomer, Head of Investment on the Square mile website.