Economists ponder “hard” Brexit stance

October, 2016 Print

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The apparently uncompromising “hard” Brexit stance from the new government under Theresa May could be a negotiating gambit and may weaken over time, according to two economists at Berenberg.

Berenberg chief economist, Holger Schmieding, and senior UK economist, Kallum Pickering, said that the recent sharp falls in the value of sterling reflect revised market expectations of a less favourable outcome from Brexit for the UK economy. They commented in a note: “Prime Minister Theresa May’s non-confrontational approach to Brexit had initially raised hopes of a soft outcome. But the hard stance she took at the Conservative Party conference on migration and sovereignty has changed the tide. Markets are nervous.”

While the UK economy has performed well since the referendum result was known, the economists said that the long-term impact could still be significant. In addition, the post-Brexit economic buoyancy could encourage a hard Brexit by the UK government, with loss of access to the single market. However, they said that May could be seeking to avoid the mistakes of David Cameron, who took a soft line in pre-Brexit negotiations with the European Union, which was also made public. Schmieding and Pickering said: “Some posturing and tough rhetoric early on in the coming negotiations can help Ms May to avoid the same fate. But in a year or two, when faced with weaker investment and lower inward migration now that the UK has become less attractive to foreigners, we are likely to see a more compromising stance as the long-term consequences begin to set in.”

On the outlook for sterling, they said that they expect it to move sideways for two years, or until the UK finally exits the EU. “The path for sterling will be determined by the noise about, and the substance of, the Brexit negotiations. If the UK and the EU-27 clash noisily or the UK goes for a hard Brexit, sterling will take another leg down. If negotiations go well and UK economic growth continues to exceed expectations, sterling could stage a recovery,” they concluded.

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