The Brexit Newsletter: 3 May edition

03 May, 2019

With the Easter break over and Brexit back on the agenda, what are the headlines dominating the news?

  • UK local elections reveal significant electorate frustration with handling of Brexit

  • Business continues to wait for any insight into how UK will break its domestic Brexit impasse

  • Bank of England highlights that UK’s economic outlook is intrinsically linked to Brexit

  • Governor of the Bank of England Mark Carney warns that until Brexit process is concluded there is still a chance of No Deal

Two young businessmen standing in a meeting room looking out an office window.

Business insights

PwC Ireland believes that it is prudent for companies to continue to plan for a hard (no-deal) exit. It continues to be a risk despite the European Council granting the UK an extension to Article 50 until 31 October.

While it is good news that the UK did not leave the EU without a deal on 12 April, there is still no certainty as to the final shape and timing of Brexit. No deal remains a risk until withdrawal from the EU is formally agreed.

While we hope that a positive outcome can be agreed before 31 October, the political uncertainties at Westminster mean that the possibility of no deal cannot be completely removed.

If a deal cannot be agreed before 22 May, the UK must participate in the European parliamentary elections. Theresa May is not in favour of this.

Despite the Irish economy continuing to perform well, the National Competitiveness Council have warned of possible threats to the competitiveness of businesses in Ireland. Businesses need to keep a firm eye on being prepared for any outcome.

What are the implications for business?

While there is breathing space with no-deal being avoided for the moment, we are entering a further prolonged period of uncertainty as to how and when the UK leaves the EU. The key thing is to use the time wisely. Businesses need to stay agile as Brexit stops being a moment in time and becomes the backdrop for strategy and investment decisions.

For some businesses, the wheels are already in motion. This extension will mean they need to decide whether to pause their Brexit preparations and keep their options open, roll back preparations, or re-evaluate their options on a more strategic basis. Many businesses now need to manage rolling, costly uncertainty as best they can, with no clarity as to when it might end. A challenge for businesses now is what to do and not to be complacent.

Many financial services firms had already pressed the button on moving part of their business to Dublin. They will likely continue to do so, but with a bit more time now given for them to complete transfers and get authorisations in place.

Another key risk factor for many Irish businesses is the value of Sterling. The Central Bank has warned that Sterling could fall close to parity with the Euro in the event of a no-deal crash out. This would cause significant competitive pressures and businesses will need to watch this space.

The UK leaving under the Withdrawal Agreement would be ideal for Irish businesses as the UK would enter the transition period. Our trading arrangements would remain as they are now until at least the end of 2020.

Companies should leverage this extension to advance their preparations. Even if you are well prepared, reassess your plans in the light of the extra time.

While Irish businesses would hope the Withdrawal Agreement to be agreed or for a softer 'Customs Union or Single Market' style Brexit, nothing is certain. The granting of more time is good news. However, the long-term future UK-EU relationship remains unclear. It will be very important for Ireland to keep in close contact with our UK and European colleagues as developments unfold.

The latest from London

When the EU agreed to the recent Article 50 extensions, Donald Tusk warned the UK not to waste the extra time afforded by the latest extension. Unfortunately that appears to be what is currently happening. While talks continue between the Government and Labour to find a compromise that could ensure safe passage of the Withdrawal Agreement, there is currently little evidence of a solution emerging.

Given that any Conservative or Labour agreement will involve May and Corbyn upsetting certain elements within their respective Parties, it remains to be seen whether a solution can be found, or whether it could deliver a sufficient positive net effect in terms of Parliamentary votes to carry the Withdrawal Agreement.

While this creates the potential for talks going round in circles with no solution, neither party will want to be seen as the protagonist responsible for collapsing the negotiations. The key issue for business relates to the uncertainty as to when a solution will emerge. Talks are set to continue next week. If talks collapse or Parliament rejects a joint solution, then the process will take on a sense of déjà vu as Parliament once again seeks to break the impasse via votes on alternative options.

Jeremy Corbyn this week defeated an attempt by pro-EU elements of his party to commit Labour to holding a second referendum under any circumstances. Instead, Labour will commit to support a public vote on Brexit only if it fails to secure changes to the Government’s Brexit deal or force a general election. Labour restated that securing a Customs Union with the EU will continue to be its Brexit policy.

UK local elections

Traditionally local elections see political parties judged on their engagement with local issues as opposed to the more mainstream national political and policy challenges. However, Thursday’s UK local elections offer the electorate a first opportunity to express their opinion on the UK’s Brexit strategy.

While Conservatives were always expected to endure a hard time at the polling booth with exasperated voters expressing their frustration with the Government’s handling of Brexit by imposing significant losses on the party, many felt that Labour stood a good chance of making strong gains. However, Labour appears to have failed to capitalise on voters punishing the Conservatives due to a view amongst the electorate that Labour has been complicit in contributing to the on-going Brexit impasse. In addition, frustration amongst both Labour leave and remain supporters over the party’s hesitation in recent months to take a strong clear Brexit position and instead focus on trying to find a middle ground that appeases everybody appears to have also hurt them too.

The Lib Dems who are strongly opposed to Brexit have emerged as the main winners and look set to make significant gains.

With Brexit frustration the key theme of the local elections, it remains to be seen whether this will provide more focus and urgency to next week’s cross-party talks.

The UK economy

Consumer confidence

This week saw the release of the latest data on UK consumer confidence. While the GfK analysis showed consumer confidence holding steady for the third month in a row, confidence continues to remain firmly entrenched in negative territory amidst Brexit’s ongoing uncertainty.

Economic growth

The Bank of England (BoE) provided somewhat more positive news when upgrading its 2019 GDP growth forecast from 1.2% to 1.5%. Q1 GDP growth of 0.5% appears to have been higher than previous forecasts with Q1 economic activity benefiting from larger than expected levels of inventory stockpiling by companies in the UK and EU ahead of the UK’s March Brexit deadline. However, BoE expect that this boost will be temporary with growth slowing to 0.2% in Q2.

Brexit related uncertainty continues to weigh on UK business investment as firms continue to delay spending. BoE highlight that business investment fell by 0.9% in Q4 of 2018, the fourth consecutive quarter of decline, with this trend set to continue this year.

BoE continue to highlight that the UK’s economic outlook is intrinsically linked to Brexit and will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. Bloomberg report Mark Carney warning that until the Brexit process is concluded there will be a chance of no deal.

Graph illustrating the GfK headline consumer confidence index from Bloomberg.

Brussels developments

As the EU focus shifts towards the upcoming EU elections, the EU once again finds itself waiting on the UK to determine the next Brexit steps. There is a positive in that the sense across the EU is that the risk of an imminent crash out has significantly receded.

Principal EU Brexit concerns centred on worries of how the PM will break the deadlock. There is a concern within the EU that the UK could once again spend the next few months engaged in ideological Brexit discussions without a real lack of urgency to find a domestic solution. Such an unwanted scenario would effectively lead to a re-escalation of no deal risk at the end of the summer as the run-in to 31 October comes quickly into view.  

Contact us

David McGee

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8785

John O'Loughlin

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6093

Andrew O'Callaghan

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6247

Owen McFeely

Director, PwC Ireland (Republic of)

Tel: 353 1 792 8162

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