UK: The Start Of The Brexit Journey

Last Updated: 24 January 2017
Article by David Noon

Prime Minister May's speech yesterday, 17th January, has brought some clarity to the Brexit debate. Many of the key points had been signposted in advance, but there was some new detail, and the desired outcome from the negotiations that will define the future shape of our relationship with the EU is starting to emerge.

There is much still to digest, but my initial thoughts, informed by discussions with Deloitte's Brexit subject matter experts, are set out below.

  • The Prime Minister made it very clear that she is neither anti-trade nor isolationist, a notably different approach to the campaign rhetoric of President-Elect Trump. She was at pains to emphasise that the UK wishes to enter a new era of global free trade, with Brexit as the catalyst. 
  • Unsurprisingly, given the UK is on the verge of entering negotiations with the EU, the speech set out a wish list of aims. It's not clear, of course, how many of those aims will come to fruition and there is recognition that the negotiations will involve compromise. Early indications are that reactions are mixed across mainland Europe – reactions of course that will be important for understanding the likelihood of achieving the UK's stated aims. 
  • The UK's opening stance is acceptance that membership of the single market is not a possibility. The Prime Minister underlined respect for the EU's consistently articulated position that the fundamental treaty freedoms are indivisible, and confirmed that controlled migration from the EU is her priority. There was much emphasis on the government's wish to attract the brightest and best skilled talent from around the world, which is promising for those sectors reliant upon highly skilled workers – but no word on unskilled and semi-skilled labour critical to some industries.
  • Having accepted that membership of the single market will not be possible, the Prime Minister stated that the UK would like access to it via a best-in-class free trade agreement (FTA). It was also made clear that the UK would like to negotiate FTAs with non-EU countries. Doing so would create a fundamental tension with membership of the Customs Union. The Prime Minister instead advocated a customs agreement of some form, but had no preconceived position on how that might be achieved. Nevertheless, her clear advocacy of tariff-free trade in goods is welcome. 
  • Business will have been pleased to hear that the government accepts the need for transition. The preference is to come to an agreement with the EU regarding our future relationship within the 2 year time period permitted by Article 50, but with a phased implementation. Some aspects could phase in quickly, whereas others may take longer. 
  • The Prime Minister made several references to the need to strengthen the union between Scotland, Wales, Northern Ireland and England. The elections in Northern Ireland will inevitably lead to some delays in reaching agreement on what form these strengthened ties may take; the geography of the island of Ireland make for unique issues requiring unique solutions.  
  • The early sections of the speech included a pledge for a "fairer Britain", with clear commitments to, for example, maintaining and building on workers' rights. This is not by any stretch of the imagination the deregulatory agenda from the Government that had been envisaged by some Brexit commentators.
  • There was very little in the speech on trade in services. As services make up 80% of the UK economy, this remains a key area of uncertainty.
  • Several references were made to the end being more important than the means, but no details were given on how the government might meet its aims. The Prime Minister also took the opportunity to reiterate that details of the full negotiating position would not be laid out, so we can expect a degree of ongoing uncertainty as negotiations commence.
  • Sterling rallied as the Prime Minister spoke, seemingly because of the news that both Houses of Parliament will be allowed to vote on the deal negotiated with the EU before it is finalised. This calls into question what might happen if either House did reject the deal. However, the vote is expected to diffuse some of the political tensions surrounding the proposed negotiating position. It may also mean that the eagerly awaited Supreme Court decision on triggering Article 50 may be less important than we had assumed. 

Despite indications that we can expect a 'cleaner' Brexit than many may have hoped for, the greater clarity now afforded can only be welcome.  In Ian Stewart's Year Ahead webcast last week we polled the audience about the long term impact of Brexit on UK growth. Of 1,600 people on line, 800 people voted: the vast majority expect at worst modest negative effects, with over a third forecasting either no or a positive effect – a reassuring viewpoint.  It fits with other recent signs that sentiment may have become a little less negative - Andy Haldane at the Bank of England has acknowledged that the Bank overestimated the initial Brexit effects; Mark Carney has said Brexit is a bigger threat to Euro area financial stability than to UK financial stability; economists have just upgraded their forecasts for UK growth this year for the sixth consecutive month; Fitch says all UK sectors will remain resilient even if it's a "hard" Brexit. 

Overall, the speech leads to the inevitable conclusion that the UK and Europe will have a more distant form of relationship than some of the conceivable alternatives to full EU membership. The terms of the separation looks set to be more definitive and quicker than other options that the government might have selected. 

This would now seem sufficient for businesses to update their planning, and indeed to plan for a scenario of most change. This should ensure they are prepared for substantially different trading conditions and access to talent, both with Europe and beyond.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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