As the UK will trigger article 50 by the end of March, Brexit starts taking shape. We’re looking at short and long-term prospects for the UK economy, as well as how businesses should gear up.
Article 50 of the Lisbon Treaty, i.e. the clause that sets out how a member may withdraw from the EU, allows up to two years of negotiations once a departing state officially notifies the European Council of its intentions.
Earlier this year, the Supreme Court compelled the Government to legislate before going ahead with article 50. The past week saw the EU Withdrawal Bill moving between the two houses of the Parliament, with a final vote in its favour last night. We expect the bill to receive Royal Assent today and thus become law.
Economic growth to slow down in 2017 and 2018
The UK economy has done much better than expected because consumers have kept spending, as wages increased faster than inflation. The worries about uncertainty affecting investment have not yet come through, but they may do so soon. The political situation, which looked very rocky after the referendum, has actually stabilised.
Although the economy has performed quite well end 2016, we can expect slower growth in 2017 and 2018. We’re expecting 1.5% growth (compared to 2% for 2016), as inflation comes through and squeezes consumer spending. There will also be a drag on investment from increased political and economic uncertainty. We also expect the Bank of England to keep monetary policy unchanged, at least over the short term.
Positive outlook for 2030
On the short term, inflation will influence the economic outlook and businesses should watch this trend to make sure their salaries are still competitive. The Government wants to do everything they can to keep confidence relatively high for consumers and businesses. Therefore, some additional tax reductions on a selective basis could well be on the cards for the budget.
Long term forecasts depend on a reasonable free trade agreement with the other member states. Playing on the UK’s traditional strengths – a very flexible place to do business and an innovation hub – will support growth. By 2030, the UK will still be one of the well-performing economies in the world.
In terms of trade prospects, they depend on several key factors: securing the best possible access to the Single Market, a programme of trade promotion in non-EU markets like the US, supply-side reform, and active engagement with other major international institutions such as the World Trade Organisation (WTO). US financial institutions are also awaiting details of President Trump’s trade policies.
Brexit exposure is real, planning for the next two years is key
By now, businesses should have put together contingency plans for various exit scenarios. As the UK will enter a two-year period of negotiations, companies must anticipate the customer impact of proposed operational changes. They should adapt their plans as details arise. Financial effects are a concern for non-EU companies that sell to, buy from, or operate in the UK or EU, or are engaged in their financial markets. They should review contractual agreements quickly to understand Brexit exposures. They should also focus on reporting triggered by currency volatility, changes to hedging strategies, collectability of receivables, potential asset impairments, and intercompany activity.
Brexit will affect how individuals and businesses pay taxes. Companies should plan for changes to VAT, corporate taxes, customs duties, and more. They should also take into account the impact on their employees and help them address concerns.
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