4 bumps the UK will have to face now that May has triggered Article 50

Even with the official commencement of the Brexit process – as finalised by Prime Minister Theresa May’s signature on the letter to trigger Article 50 of the EU’s Lisbon Treaty today – Bank of Singapore’s (BoS) chief economist Richard Jerram is certain that a deal for the UK to leave the Union is “almost impossible”.

“To reach an agreement on such a complicated issue as market access – a new trade deal – in such a short time frame is hard to imagine,” expounds Jerram in an economics research report on Wednesday, noting that the UK is “not well-placed to bear the costs of a messy exit” given its large budget and trade deficits.

Unrealistic schedule

For starters, Jerram notes a challenging timetable for the exit to occur given EU’s intention to come to a deal on the UK’s bill for exiting first, before discussing residency rights of EU citizens living in the UK, and vice versa. The situation is further exacerbated by the need for each of the remaining EU members to ratify any deal, which is expected to take six months, he adds.

“Realistically, this means agreement on market access post-Brexit will need to be completed in a little over a year. The UK simply lacks the expertise and resources for this to be realistic,” says the economist. “As a result, some kind of transition arrangement seems likely to be necessary, but it is unclear if this will happen.”

Arguing over money

Jerram notes how the EU’s suggestion that the UK will need to pay around GBP 60 billion ($104 billion) to cover existing obligations has been met by “strong resistance” from pro-Brexit politicians – and adds that the arguments over money will reduce the time available to discuss market access, hence leading to another drop in GBP. On that, he recommends looking to buy should it head towards GBP/USD1.15, given that the valuation for the currency is looking very cheap.

Brexit to hurt trade

Given that most resources will be devoted to facilitating EU negotiations, the economist says there is almost no chance that other trade deals will be in place by 2019, leading goods and services trade to be “badly disrupted” when the UK exits the EU. Although the UK may stand to benefit from a lower level of regulation beyond the EU in the longer term, he believes the next few years is still likely to be “painful” during its adjustment to Brexit.

Snowballing of socio-political issues

“The potential for another Scottish referendum and the complexities of Northern Ireland’s situation simply add to the burden. There are too many issues to resolve in such a short time frame,” comments Jerram. He also believes the UK property market looks vulnerable to exiting with no deal in place, while the financial sector is likely to be eroded.

“There is also the question of whether Brexit will inspire others to leave. Frexit looks very unlikely, but before long we will have to turn attention to elections in Italy, which could be much more problematic,” he adds.

This article first appeared in The Edge Singapore Market Report.

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