Brexit Three Months On – Still More Questions Than Answers

More than three months have now passed since the UK electorate caused massive surprise and shock by voting to leave the EU. The intervening period since the momentous vote has been quite strange, putting it mildly. If Jeremy Corbyn had been replaced as leader of the Labour Party by the very pro-EU Owen Smith, there was some chance that the UK might somehow row back from the vote, but that possibility has faded. Prime minister May has stated on numerous occasions that “Brexit means Brexit’, and she has committed to invoking Article 50 in March 2017. That will set the ball in motion and will bring to fruition all of the issues and concerns that surround the whole process. It will take a lot longer to provide solutions to address the numerous issues that will have to be addressed. The Big Question The biggest question is of course the nature of the trading relationship that the UK will have with the EU post exit. Soft-Brexit would describe a situation where the UK would have access to the EU market and would make some contribution to the EU budget and accept many of the terms and conditions of the market, particularly the free movement of people. This would be politically problematical, as the vote in June was heavily influenced by the desire to protect its borders from inward migration. Hard-Brexit would describe a situation where the UK would not be part of the EU’s customs union and trade between the UK and the EU would be subject to trade barriers such as tariffs and quotas. Initially at least this would impact negatively on UK trade with the EU. Longer term, the UK could develop trade deals with non-EU countries such as China, but this is easier said than done. The EU is the UK’s biggest trading partner for a number of reasons, but proximity is the most important factor. Geography tends to be the biggest driver of trade. This is not to suggest that the UK would not trade with the EU and vice-versa, but it would be done under much less favourable terms. Once Article 50 is invoked early next year, the negotiating process will be politically extremely difficult. In relation to Brexit, uncertainty is still the byword and there are still many more questions than answers surrounding the whole extremely complicated process. However, the odds are leaning heavily towards a Hard-Brexit. Much of course could change over the coming months, but currently that is how the odds are stacked. UK Economic Performance In terms of the UK economic performance, the world has not ended for the UK since the momentous vote. Consumer confidence and consumer spending have held up pretty well. That is not too surprising, as Brexit has not yet actually happened and Article 50 has not yet been invoked. Furthermore, we are talking about a relatively short period of time since the vote. The main concern for the UK economy has got to be focused on how the business sector reacts. Bank of England and other surveys are suggesting weaker business investment intentions, which is not terribly surprising. Making a big investment decision against a background of such uncertainty in relation to the UK’s future relationship with the EU is not straightforward. Nissan’s investment intentions in Sunderland will be closely watched next year, as production decisions will have to be made on some of the models that are currently manufactured in Sunderland. Given that Nissan serves the EU market out of Sunderland, not being a member of the EU could be problematical. The Renault plant in France might provide an attractive alternative. Time will tell, but one would have to have concerns about the short-term impact on business investment in the UK. The most obvious impact of the Brexit vote has been the ongoing sharp fall in the value of sterling. It has lost over 25 per cent of its value against the euro since last November, with much of the weakness occurring since June. The risks would certainly appear to point towards further sterling weakness over the coming months. From an Irish perspective the path of sterling and the near-term prospects for the UK economy are critical. The longer-term issue is of course the trading relationship that the UK will have with the EU. Ireland’s economic performance is holding up pretty well since the Brexit vote, but the currency movement in particular is giving cause for concern, and we have certainly seen some softness in merchandise exports to the UK in July and August. If current sterling weakness is maintained or gets worse, clearly it will pressurise exports to the UK and tourist numbers from the important UK market in 2017. Budget 2017 will have to take those vulnerabilities into account. Motor Trade On the motoring front, it has been another good year for sales, but growth has weakened consistently as the year progressed. In the first nine months of the year, new car registrations totalled 143,201, which is 18.4 per cent higher than the same period last year. The annual growth rate in February was 36.9 per cent, but sales in September were 1.5 per cent down on September last year. The slowdown in sales probably reflects an element of Brexit related uncertainty undermining consumer confidence. For the full year sales are likely to be around 149,000. Looking ahead to 2017, there is immense uncertainty concerning new car sales. Brexit is the obvious dark cloud. An unchanged level of sales looks the most appropriate forecast at this juncture, but this could change in either direction as non-economic events unfold. A significant feature of the car market in 2016 has been the strong growth in used car imports from the UK. In the first nine months, 51,447 used cars were imported from the UK, which is 38.9 per cent up on last year. Imports in September were over 80 per cent higher than last September. This is reflecting sterling weakness and could become an even more significant feature of the market in 2017. These currency-driven cheaper imports could displace new car sales and the second hand market. Budget 2017 will be presented on October 11th. There has been considerable speculation about tax changes that would make diesel as a fuel and diesel vehicles less attractive. Given that such a move would be seen as anti-rural, and given the complexion of the Dail, with rural Independents quite influential, I would be surprised if any changes of significance were to be introduced. #Brexit #JimPower