UK: Key risk is Brexit - Westpac

UK’s key risk is Brexit and negotiations should restart in mid-Jan as domestic political vulnerability is intrinsically tied to Brexit, according to Tim Riddell, Research Analyst at Westpac.

Key Quotes

“2nd stage negotiations for Brexit should start in mid-January and are supposed to end in October 2018 in order to have a draft agreement in place for UK and pan EU parliamentary voting. Although the initial stage has been deemed to have completed, the majority of 1st issues still need to be clarified. This means that the period into the next negotiations is likely to be fraught and that those initial 2nd stage negotiations will begin an even more complex series of discussions around the unravelling of litigation as well as plans for trade and transition.”

“Achieving the path to 2nd stage negotiations does not resolve domestic pressures within the Tory party, with their DUP support (Irish border is not resolved), within parliament nor across the country. Political risk could appear at any point and current Labour opposition policies would be very GBP negative.”

“The Bank of England has stated that Brexit is their key concern for UK economy and is a factor behind their glacial policy grind towards 1.00% Bank Rate into late 2020. Their Agents’ Report, as well as external surveys on business intentions will prove critical as will the next Inflation Report at the 8th February MPC meeting. The constraints on household finances and the investment & employment intentions of business are also key.”

“GBP should remain capped, despite relatively solid data, with Brexit risks maintaining downside pressures.”