Donald Trump’s first weeks in the White House have overshadowed what would otherwise have been the major issue in the media: Brexit.
Over the last few days the British Parliament has voted to endorse Britain’s departure from the political block, the Minister charged with leading the UK’s negotiations has delivered a Brexit White Paper, and the Bank of England has upgraded their growth forecasts for the UK.
So what is up with Brexit? If growth is up, is it all ok in Britain now? Was Brexit a storm in a teacup?
The truth is that both good news and bad news exists for each side of the Brexit debate to claim that they were right.
First to the Bank of England.
This week the BoE Monetary Policy Committee unanimously decided to keep interest rates on hold and decided to lift GDP growth expectations to approximately 1.25% higher over three years than predicted post Brexit vote in November 2016.
“See,” many Brexit campaigners may say, “there was no crash and all is fine”.
However, the Bank of England goes on to say that growth prospects still remain 1% lower over two years than the May 2016 pre-Brexit expectations. “See”, Remain supporters can say “we are still suffering.”
So what is going on in Britain?
The British central bank is saying there was no crash post-Brexit, but growth is still lower than the pre-Brexit expectations. Both sides of the Brexit debate can claim a win here if they chose only the data that supports their own side.
But when one reads into the Bank of England statement one sees a complicated group of factors impacting on the decision to keep interest rates steady.
No massive drop in consumer demand eventuated post Brexit, in fact domestic consumer demand remained buoyant. One of the reasons cited was the impact of an 18% lower pound keeping low interest rates in place encouraging borrowing and spending.
The BoE is charged in its charter to control inflation first, unless it sees in doing so would have a significant impact on growth, or if the cause of the inflation is short term in nature.
So now we get complicated.
The full impact of the lower Pound has not fully flowed through to higher import prices thereby raising inflation figure. The Bank of England sees inflation going above target over the next three years.
Normally inflation is caused by fast growth, not a drop in currency, hence the bank would normally raise interest rates to control the growth and hence inflation.
However, this inflation spike is caused by higher import prices from a lower Pound that itself resulted from Brexit. Once higher import process have been in place for a full twelve months then year on year inflation return to normal as the one off effect of the dropping Pound will have been fully absorbed.
So inflation is up because the Pound is down and growth is higher than predicted in May but lower than predicted in November.
Clear? No, messy.
In an effort to clarify the current uncertainty the Government has launched its Brexit White Paper to set out the framework for negotiating the UK exit from the EU. The White Paper does not set out what the UK will look like post Brexit. Rather it sets out how the government would like the UK to look post Brexit.
In the negotiations the UK Government needs to stay aware that a negotiating position is not the same as a negotiated outcome. Regardless of what the British Government wants, any post Brexit deal has to have the unanimous agreement of all EU member States. Any EU county could put their pet issue on the table to block a deal making predicting the final shape of the exit deal very difficult.
For example, the British and the EU could come right up to a deal time just to see the Spanish say ‘we will only agree if we get Gibraltar back’. No deal.
So where is Britain today?
Current economic data, as reflected in the Bank of England interest rate decision, gives a middle of the road‘wait and see’feel. The White Paper paints a framework for negotiation with no real clarity yet on what the negotiated outcome will look like. This also gives a ‘wait and see’ feel.
At least on one issue we have certainty. The Commons passed by a four-to-one vote the legislation to enable the Prime Minister to trigger the Article 50 start to the Brexit Negotiations. Whilst there are still some hurdle for that legislation to pass it looks like the Prime Minister can still meet her late March target for starting the formal process of negotiating Britain’s exit from the EU.
So in summary, the economy is neither good nor bad. The shape of post Brexit Britain is yet to be determined but at least we know that negotiations will still start.
Once the UK is free of Europe then Britain can negotiate its new Free Trade Agreement with the US. If the British PM thinks this will be easy then Malcolm Turnbull may have some advice on certainty from Donald Trump right now.
Anyone want to trade places with the UK Prime Minister?
Andrew MacLeod is a visiting Professor at Kings College London, a corporate director in Australia and the US, a former high level UN official and former CEO of the Committee for Melbourne. He can be followed on @AndrewMMacleod