With markets fearful of an extreme left wing government, Kallum Pickering, senior UK economist at Berenberg, says that it’s the prospect of a Jeremy Corbyn premiership that is binding the ‘Brexiteers and remainers’ together. Pickering also talks about how to trade GBP/USD, as well as the prospects for UK gross domestic product (GDP) and inflation.
Stage three: the future trading relationship between the UK and the EU
Of the three stages of Brexit, two have been settled: the divorce back in December and the transitional period last week.
The future trading relationship between the UK and the EU is what remains to be thrashed out. According to Pickering, most markets think the deadline for this is 29 March 2019, when the UK leaves the bloc, but realistically it will be six months earlier, because the deal needs to be ratified by all member states.
Border fudge or Corbyn PM
For the UK, the position of the Democratic Unionist Party (DUP) party in Northern Ireland matters more than that of Labour, the official opposition, Pickering believes. This is because Prime Minister Theresa May needs the Democratic Unionists for her parliamentary majority.
The EU has proposed a Canada style free trade agreement where the border runs down the Irish Sea. That would not be acceptable to the DUP, as it would breach the UK’s single market. A UK-EU customs union is seen as the only fix for this conundrum. But the Brexiteers would push against that. Pickering notes, however, that the Brexiteers have a track record of giving in, because the alternative is worse. The risk is that failure to compromise would trigger a UK election and a resulting Jeremy Corbyn government. It’s the reason the Brexiteers agreed a divorce bill three times what they initially said, Pickering explains, adding that it’s the reason they accepted single market membership during transition, despite saying that was a red line.
The long and short of Brexit and the UK’s economic outlook
Pickering also discussed with IG’s Jeremy Naylor the outlook for the UK post-Brexit, both short term and long term. Brexit is a bad economic policy, he says, but the UK still looks a strong economy in a European context.
Soft boost to sterling
In terms of sterling, he envisages a semi-soft Brexit would see the pound at $1.50 by the end of 2019. He added that inflation would be 2.3%, growing 1.7% this year and 1.8% in 2019.