Yesterday, the Prime Minister finally delivered her 12-point plan for taking the UK out of the EU. In her detailed speech, she set out her vision for a ‘managed Brexit’ that would seek ‘a new, positive and constructive partnership between Britain and the European Union’. Here we comment briefly on global economic progress and the background for a ‘managed Brexit’:
The Global economy has started well in 2017 with good momentum. We believe ‘Reflation’ (expanding economic output, which is the total value of all goods and services produced) should gather pace through the year. However, the main risks will be politics and protectionism (restraining trade between countries through methods such as tariffs on imported goods and restrictive quotas).
Global economies were positive in 2016 and the pace of recovery accelerated in the second half as commodity prices stabilised and China’s financial stimulus program (essentially funding from the Chinese government) commenced. Inflation has now become a talking point again and economists generally feel that the global economy is in a good place moving into 2017.
The US economy is very much in focus as we get more clarity on the speed and effectiveness of policy changes under President Trump. A stable oil price, historically low unemployment and more investment following tax reforms mean that inflation will increase. However, a higher dollar, higher interest rates, immigration restrictions and perhaps less trade suggest there will possibly be ‘headwinds’ as well this year.
China will be the principal economic focus as a progressive withdrawal of financial stimulus (to slow down the country’s property market) slows her Commodity producers and economies most closely linked to the Chinese economy are at risk.
In Europe, easier fiscal policies (adjustment of government spending levels & tax rates), strong real wage growth and good private consumption trends could mean positive outcomes for 2017. That could allow the European Central Bank (ECB) to taper (reduce) its Quantitative Easing (QE) programme later in the year. However, Europe also faces some potential headwinds, notably from the UK, where any Brexit-related slowdown could affect the continent through the important trade links between the two.
The UK survived Brexit (But we’re still in the EU! – Ed) much better than many observers expected. How sustainable this proves in 2017 is a moot point, with the implementation of ‘Article 50’ likely to act as a reminder of the difficult period of negotiation ahead.
Following the Prime Minister’s speech yesterday, here’s a breakdown of the key points:
- The UK will leave the single market but seek a new and equal partnership between the UK and the EU.
- The UK will leave the EU customs union.
- The UK will try to negotiate transitional arrangements to allow business to adapt to a new regulatory and legislative framework.
- Existing workers’ rights will be maintained and protected.
- A wish to guarantee the rights of EU workers currently in the UK to remain.
- The UK will try to secure a phased transitional deal to avoid a ‘cliff edge’ scenario, which may bring a threat to economic stability.
- The UK will aim for a new ‘bold and ambitious’ trade agreement with the EU and new free trade deals globally.
- The Government will put the final deal to a vote in both the House of Commons and House of Lords before it is adopted.
- The Prime Minister says the UK may have to ‘change its economic model’ if it does not secure a good deal from the EU
In response, the pound rose at the news that Parliament would get to vote on any Brexit deal, and the speech overall provided some much-needed clues as to what Brexit will mean for UK businesses. With European elections throughout the year, it is unclear whether much if anything will be decided this year and that will increasingly raise the prospect of an abrupt and disruptive departure from the EU in 2019. Nevertheless, much depends on how negotiations unfold over the coming years………
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