Few onlookers at the International Monetary Fund (IMF) meetings in Washington, D.C., this week have any idea where the United Kingdom’s post-Brexit economy is heading. Even with the tone set to reassurance by UK Chancellor Philip Hammond’s comments in an interview on Thursday that “the government is a probusiness government,” international policy-makers, investors and economists expressed confusion in the US capital about what Britain’s strategy is.
That’s because Hammond’s words come after days of blunt talk by Prime Minister Theresa May, who is now strongly suggesting that her government will prioritize strict curbs on immigration, even at the cost of doing damage to the economy and barring the UK from direct access to the European single market—a so-called hard Brexit. The risk observers now see is that Britain drifts rudderless toward its vital negotiations with the European Union (EU) that will determine not only their future relationship, but economic outcomes for decades.
“The British government doesn’t really know what its negotiation priorities are,” Rupert Harrison, chief macro strategist of multi-asset strategies at BlackRock Inc., said at an event in Washington. “You are heading for quite a hard Brexit combined with a very detailed bilateral negotiation.”
More than three months after the British public voted to leave the EU in a referendum, May’s government is only now beginning to sketch the characteristics of post-Brexit Britain. And even now the lines are hardly clear. While May put the global elite on notice this week that they’ll not be able to do business in the UK quite the same way as before, Hammond struck a more conciliatory tone, using his US trip to argue that Britain remains open for commerce even as it grapples with its approach to globalization.
The problem
The government is “strongly supportive of open markets, free markets, open economies, free trade,” Hammond said. “But we have a problem—and it’s not just a British problem, it’s a developed-world problem—in keeping our populations engaged and supportive of our market capitalism, our economic model.”
That’s left others still asking for signs as to Britain’s true course.
The UK “needs to clarify its ambition for the future,” European Commission Vice President Valdis Dombrovskis said at an event at the Peterson Institute for International Economics in Washington on Thursday. “Only this can put an end to the uncertainty that the referendum result has created.” Economists are now trying to digest the likely consequences of May’s recent shift to a harder anti-immigration line on the UK economy. Initial economic data since the vote have displayed resilience, helped in part by a weaker pound.
Factories had their best month in more than two years in September as export customers took advantage of lower prices. That said, analysts fret that the longer-term outcomes won’t be so positive.
“I don’t think Theresa May has made up her mind about where she wants to go,” Rain Newton-Smith, chief economist of the Confederation of British Industry, said at an event in Washington. “We could continue to be surprised for a while by the short-term resilience of the UK economy. The harder question is what kind of economy we will become over the next five to 10 years.”
Economic fallout
Bank of England policy-maker Michael Saunders said this week that the economy would likely grow more than forecast next year, above 1 percent rather than the 0.8 percent forecast in August. But while the uncertainty over the country’s negotiating strategy continues, the incoming data could create a false sense of security, according to Stephanie Flanders, chief market strategist at JPMorgan Asset Management.
“We’re not going for the best-case scenarios any more, we’re looking azwwt the harder cases,” she said in Washington. “My worry as an economist is the short-term economic news will put ministers and negotiators in completely the wrong frame of mind. Britain has a long history of really irritating Europeans. This sense of invincibility that comes from the early data could be very costly.”
The EU has said that it won’t start any negotiations with the UK over the shape of their future economic relations until the prime minister triggers Article 50 of the Lisbon Treaty, the formal step needed to leave the bloc. She said this month she’ll do that by the end of March 2017.
“We’re seeing, unusually, quite a lot of discipline from the Europeans, who are saying, we’re not going to have pre-discussions, pre-negotiations, until we see the color of money—what exactly does the UK want,” said David Wright, chairman of the financial services think tank Eurofi, in Washington. “The reality is, today the UK doesn’t know what it wants.”
