Sunday, September 11, 2016
May starts on the long and winding road to Brexit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Summer is turning to autumn, though the weather has yet to adjust in some parts of the country. An Indian summer is perhaps appropriate for post-Brexit Britain, though readers will be aware that the term originated in North America, not the subcontinent.

We are, of course, not yet post-Brexit Britain, though at some point we will be. In a moment I shall talk about the three stages of Brexit.

First, what do we know so far? The shock predicted here duly happened, reflected in a sharp fall in sterling and an immediate drop in confidence and activity. Despite a small recovery, the pound’s average value against all currencies remains 9% below pre-referendum levels and 13% lower than a year ago. Many people who in the past would have regarded a big fall in the pound as a sign of failure have become enthusiastic devaluationists.

The shock has been contained. No prediction of an immediate dive into recession was ever made in this column – I can’t speak for George Osborne – and indeed I was surprised at the extent of the slump in some of the surveys in July, which deteriorated at a faster pace than when the global financial crisis hit.

On July 31 I wrote that confidence could be rebuilt and the shock contained, as long as common sense prevailed and policymakers reacted. So it has proved.

The Bank of England, despite much misplaced criticism, has been instrumental with its “whatever it takes” measures, in turning sentiment around. All the August survey improvements followed its actions.

The swift transition to a new administration under an apparently sensible prime minister has also been very helpful. Remember that we could, by now, have only just seen the end of a bruising Tory leadership contest. Anybody who needs reminding of how unsettling that could have been should recall Andrea Leadsom’s brief leadership campaign, the strange bunch of Tory MPs on their “Leadsom for leader” march down Whitehall, and Boris Johnson’s odd endorsement of her. For that, even more oddly, he was rewarded by Theresa May with the job of foreign secretary.

There have been other confidence-enhancing factors. The Brexit vote did not provoke a wider crisis in Europe. Markets, meanwhile, remain obsessed with monetary policy. Brexit meant, not just lower rates in Britain but less likelihood of higher rates elsewhere, so boosted stock markets. Perhaps disturbingly, the market reaction to a Donald Trump victory in America might be dominated by what it means for the Federal Reserve’s next interest rate decision.

This is the first stage of Brexit, and we are only a little way through it. It is, if you like, the phoney war stage, when nothing important has actually happened. The second stage will begin when the government invokes Article 50 of the Lisbon Treaty, probably in the first half of next year, and begins the formal two-year process of exiting from the EU.

Stage three is when that process is “complete” and Britain begins the formal task of negotiating her post-EU future with the rest of the world. Complete is in inverted commas because nobody expects Britain to have fully or even mainly extracted herself from the EU within two years. Many EU laws will remain on the UK statute book.

Sharp-eyed readers will have noticed that there might have been only two stages of Brexit. Before the referendum Downing Street suggested that Article 50 would be invoked immediately in the event of a Brexit vote, a view endorsed – at least for a few weeks – by the Labour leader Jeremy Corbyn.

Stage one has some way to go and, while most of the recent evidence has been reassuring, it would be wise not to get as carried away as some of the tabloids have. Long experience has taught me that upside surprises are often followed by downside ones.

The very level-headed Institute of Chartered Accountants in England and Wales (ICAEW) said in its new forecast on Friday that the government needs to act quickly to prevent a slump in business investment this year and next. The big worry in stage one is that falling business investment coincides with weaker consumer spending, as households are hit with rising prices. It does not have to happen – the pass-through from a lower pound to inflation may be less than feared - but it is a significant risk.

The National Institute of Economic and Social Research says the economy has been close to flat-lining since April, and that there remains a heightened risk of a technical recession – two successive quarters of falling gross domestic product, between now and the end of 2017.

That covers the period straddling the end of stage one and the start of stage two. What the government does between now and the invoking of Article 50 is important, not least Philip Hammond’s first big set of announcements in his autumn statement on November 23. The new chancellor is clearly not one to rush things, though has hinted at more infrastructure spending.

Even more important is what the government says when it invokes Article 50. May said last week she does not want to give a running commentary on Brexit, or reveal her negotiating hand, not least because she is not yet sure what it will be. But clarity, if not full detail, will be needed when the formal process of exiting from the EU begins. Business will need much greater certainty than it has now.

Achieving that certainty, particularly when it comes to stage three and Britain’s post-Brexit future is perhaps the greatest challenge. Sir Andrew Cahn, the former head of UK Trade & Investment, the official body, knows what he is talking about when he says it will take a decade or more to negotiate post-Brexit trade deals with the big global economies. That process will not start until we have formally left the EU.

Where Britain ends up, despite the bullish talk of early trade deals with countries such as Australia, represents a huge challenge, and is a recipe for continued uncertainty. One example of that was provided a few days ago by the Construction Products Association, whose industry forecasts are closely-watched in the sector.

Normally it produces forecasts for five years ahead, important for a sector that has to plan for the long-term. This time, it has decided it can only do so to cover the period until the end of 2018, beyond which, it says, there is just too much uncertainty to produce sensible forecasts. Its central forecast is for a mild construction recession next year, with optimistic and pessimistic scenarios on either side of it.

The government will need to work hard to minimise uncertainty and maintain confidence through the long process of forging Britain’s new place in the world. Nobody in government pretends that will be easy.

The prime minister does have one important advantage, however. Because there was no workable policy content in the Brexit campaign, and certainly no useable economic policy content, she starts with a blank sheet of paper. As we have seen with her dumping of the Australian points-based system, described here on May 29 as thoroughly unsuitable for Britain, it is up to her to define what she means by Brexit. A pragmatic approach beckons, which could succeed. In coming weeks, when events permit, I shall describe some elements of what that pragmatic approach should involve.