Economist, UBS AG
Last week, we were greeted with the news that the UK and the EU27 have agreed the terms of a transition arrangement for when the UK leaves the bloc next March. As this outcome was our “base case”, I confess to being pleased about the result. It also provides me reason, on this ‘one-year-to-go’ milestone, to celebrate that most elusive factor which has been so conspicuously absent to-date: certainty.
The certainty that a disruptive change to trade with the EU will not occur a year hence should calm the nerves of companies in the UK as they assess their operations.
The naysayers will point out that the agreement has no legal basis at this stage, so firms up and down the country may still have to exercise their contingency plans for a “no deal” scenario.
Maybe, but I tend to side with the view that this represents another step and is evidence that, when all is said and done, both sides have significant economic interest to minimise the potential disruption that Brexit may cause.
If, as I hope, this more constructive take on the latest stage of Brexit negotiations prevails for the next 12 months and beyond, then the downside risks to the economy in the short term should fade. It is unlikely to inject some much-needed positive sentiment that could lift growth out of its stupor, but the economy is still making consistent progress.
This should suffice to encourage the Bank of England hawks to swoop, raising interest rates from 0.5% to 0.75% at the Monetary Policy Committee meeting in May. As for further moves, much will likely be driven by how economic data unfolds, rather than the political backdrop.
As the year progresses, there seems a high probability that uncertainty will return around the time parliament meets to ratify the exit agreement (most likely around October). Moreover, it is likely to remain high during the transition period as the UK and the EU27 try to flesh out the new long-term trade relationships.
However, we must remember there is positive certainty to be had from other sources. Global growth is set to remain decent, which should support UK exporters. The UK labour market continues to show strength, with multi-decade highs for the participation rate. The peak of inflation seems to have passed, further supporting household budgets.
I can’t profess to have a crystal ball that allows me to predict what exact shape things will be in by March 29th 2019, but I do take cheer from the clearer picture that is beginning to emerge.