The Brexit transition agreement
In mid-March, the UK and the EU agreed some of the terms of the transition period to follow Brexit day at the end of March 2019. The transition is to last 21 months, meaning that the relationship between Britain and the European Union will effectively not change until the end of 2020. While there’s still masses of uncertainty up in the air, the transition agreement is good news.
This importantly means more time to plan for the post-Brexit environment. Faced with an uncertain future around the trading relationships between the UK and the EU, businesses might have decided to relocate some of their activities outside of the UK. Now that the ‘cliff edge’ has been taken away, there’s breathing space to see what the post-Brexit environment is going to look like.
Main difficulties, opportunities, and caveats
The main challenge is going to be maintaining and continuing to develop business within the EU. Firstly, we don’t know what the trading arrangements are going to be between the UK and the EU. When it comes to goods, it’s now widely thought that there won’t be any tariffs, although this is not set in stone. In terms of services, the situation is more uncertain. We don’t know what type of access the UK is going to have to EU jurisdictions, and vice-versa, and that can make life very difficult.
In terms of opportunities, it is in principle possible that the UK could strike more advantageous trade deals with third-party countries. For example, we can see the United States being ‘very keen’ to develop trade relationships with the rest of the world – but in practice striking a trade deal is much more difficult than making a friendly statement, especially given current international tensions over tariffs. But there is a possibility. Another opportunity is that, so far as the relationship between the EU and the UK is uncertain, it’s not impossible that you begin to see some EU businesses move into the UK, because they are uncertain of the access they will have to Britain.
So there are some opportunities there, however with the caveat that trying to strike trade agreements with large economies is often difficult and it takes time. An average EU trade deal takes five to seven years to complete. The UK should be able to do it more quickly, as it won’t have to pass each deal with 28 countries, but it will also not have the EU’s negotiating advantage of a huge market with 500 million people.
Sterling after Brexit: effect on the pound
The pound has already fallen sharply after the referendum. At current levels, which is relatively close to $1.40 against the US dollar, it's fundamentally still cheap. With the progress on Brexit talks, the pound has risen, recouping about 40% of its overall losses since the referendum.
We still view sterling as being undervalued – it’s still pricing significant downsides from Brexit. If you’re looking at a post-Brexit environment where the UK has only slightly less advantageous terms in certain areas, does that really justify sterling being around $1.40 rather than, say, $1.60? In our view, it doesn’t.
Brexit, alongside expectations of near term interest rate rises, is the main driver of the UK currency at the moment, and may well continue to be for a while, but as talks progress, we would expect a possible upward influence on sterling.
What we should also remember is that other important factors are also going to influence the pound over the medium term. One important subject is politics, and over the course of the next two to three years, investors will be looking more at what a possible Jeremy Corbyn government would mean for the economy. So even if we do get positive news on the Brexit negotiations, they may be offset by what’s going on in the domestic political arena.
Brexit and savings/ interest rates
If the worst comes to the worst and the UK doesn’t strike a deal with the EU on Brexit, in general, it would be bad news for the economy. In terms of interest rates, the implications are not clear.
While the economy would be weaker, the supply potential of the British economy would arguably also be reduced. As the Bank of England's mandate is to set interest rates to meet its inflation target, it’s not clear whether demand or supply would be the predominant factor. So, it might well be that initially the Bank of England would cut rates again, to bolster confidence, but my guess is that they wouldn’t stay lower for very long.
Implications for Britons retiring abroad, buying property and doing business cross-border
During the transition period, very little will change for British people living abroad. After that, we don’t know. UK nationals don't automatically have the right to reside in other European countries – currently, that right is granted by the fact that Britain is an EU member. That’s still something to be discussed during Brexit negotiations.
In terms of property prices, a lot will depend on the exchange rate. If you’re looking at a rising pound, that arguably makes it easier, as property prices overseas will cost less in sterling terms and those Britons moving abroad who have a sterling income might find that the pound goes further in their country of residence. Of course, if the pound falls through, the reverse will be the case, and that's what has been happening in the past year and a half.
When we should know more
The main date to keep in mind is the EU summit on 18-19 October – that’s when it is hoped that the agreement on the future relationship of the UK and the EU will be settled. It could be that the timetable slips by a couple of months, still allowing ratification by March next year. If not, we could see broad agreements in principle, and the full legal details sorted out during the implementation period.
As for full legislation, most legal experts insist that there’s no way that it can be completed by the time of Brexit. It’s too complicated. When you start trawling through some of the details of various issues you soon realise the scale of the complexity. So, we may get into the transition period and beyond without the whole deal being finalised, and it’s not impossible that the transition period is extended. That is not the government’s or the EU’s intention, but you wouldn’t rule it out.
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