Mrs May’s speech: Brexit really does mean Brexit

This week the Prime Minister, Theresa May, delivered a very powerful, constructive speech at Lancaster House, outlining her Government's Brexit strategy. In my view, there were many positives.

In particular, it contained a clear domestic and global vision. Most importantly, for the people and for the country, it was a unifying speech, moving us on from the referendum and focusing on both delivering Brexit and making it work for all. For investors and the financial markets, meanwhile, there is now a clear direction of travel.

The Prime Minister confirmed that, at the end of the negotiation process, Parliament will get to vote on the deal. Sterling rallied on this news, the thinking being that this should ensure that the deal is credible and seen as good for the economy.

Some might suggest this keeps open the risk of the deal not being approved. While that may be so, I think that risk is low, and based on what the Prime Minister said, there is more reason to be positive about what lies ahead. In my view, it is only right that Parliament gets to vote on the deal. Outside of the EU, Parliament will have more future control, while remaining accountable to the British people, who have already voted to leave.

The impact on sterling

Ahead of the referendum, it was our view that sterling was overvalued, given the UK's sizeable trade and current account deficit. Clearly it is now more favourably valued, but there is always the danger that currency markets can overshoot. Thus, it is always possible that sterling can be vulnerable to setbacks driving the negotiating process. But there are many other factors to consider, not least politics on the Continent, where elections are due this year, plus relative monetary policies.

The financial markets will focus on a combination of factors. First, this negotiation has to be viewed in the context of the UK’s economic performance and how that will impact monetary policy. Second, the markets recognise that the Article 50 negotiations are set to last two years and that there will be many different political interpretations of the progress along the way.

Indeed, there are still some who argue that the UK should be penalised for voting to leave and that it cannot have all it asks for. Third, the behaviour of the markets suggests that they are not yet convinced about the economic case, as outlined by the Prime Minister, for leaving the single market and for distancing the UK from parts of the customs union.

‘No deal is better than a bad deal’

The good news for markets was that the speech contained the detail that has been called for. The Prime Minister outlined her priorities and principles, while making it clear she will not in the future be pressurised into giving away her negotiating strategy. In those negotiations, Mrs May stressed the emphasis will be set on the end result.

Perhaps, very telling, was her message that, "no deal for Britain is better than a bad deal for Britain". Although this is clearly not her plan, the ability to walk away in any negotiation is often necessary to help secure a positive outcome.

Balancing domestic strategy with a global approach

The strong relationship between the domestic, economic and industrial strategy with that of the global approach is also key, and was touched upon during the speech. It can easily be overlooked how important both aspects are for future economic success and for ensuring public confidence about the future.

The two go hand in hand and can reinforce each other, in a positive way. They are vital for delivering sustainable and balanced future growth. Also, both need to succeed, to deliver the stronger, fairer, united and outward-looking economy that the Prime Minister said she wants to deliver.

UK still a magnet for international talent

Mrs May could not have been clearer about the need and future ability to control UK laws, once outside the jurisdiction of the European Court of Justice, and borders, thus controlling migration. In addition, those companies that need skilled international staff should be reassured by her comments.

Following her speech at the Conservative Party conference, there were some misplaced fears that Britain may turn more inward-looking. Yesterday, she stated that the UK would remain a magnet for international talent, where needed. This makes sense, particularly for the City and universities, among others.

The criticism levied at Brexit supporters is the argument that leaving the EU is bad for the economy. Based on my analysis and forecasts, it isn't. On the contrary, Brexit should help position the UK to succeed in a changing, and growing global economy. That being said, the markets need to be convinced on two issues: membership of the single market and of the customs union.

Leaving the single market but not the customs union

The economic message was a strong one. In particular, the Prime Minister outlined that the UK would leave the single market. Her comments on this were clear, precise and her analysis correct. Remaining in it, the UK would have to accept free movement of people.

Also it would bind the UK to future EU rules and regulations, which would not be good for our service sector. Stating clearly we will be outside the single market also helps avoid a messy, acrimonious negotiation with the rest of the EU.

While I think we should leave the customs union, too, she backed away from doing this, but instead presented her case well for some yet-to-be-negotiated relationship. This union has a high common external tariff in areas like food and autos, and a common commercial policy that limits us from conducting trade deals across the globe.

Mrs May wants to be outside these, while retaining friction and tariff free trade. All this is part of the negotiation to come. Market attention will be on the progress made regarding this aspect of the negotiation.

Seeking a bespoke trade deal

The takeaway was that she will seek a bespoke UK deal with the EU, as that makes sense economically for both sides, and for a number of our exporters and theirs. We are, after all, a big EU export market. The speech mentioned having a ‘Free’ Trade Agreement with the EU, and of ‘trade agreements’ with the rest of the world.

This is significant. It highlighted the desire to reach a comprehensive EU deal. But, in terms of trade deals with the rest of the world, these can play to our strengths, be more focused and easier to agree, and thus mean they are easily repeated.

Reassuring the 48 per cent

An important aspect of the speech's message is a change management agenda, common in business when a new direction is needed and not everyone is convinced of it. The speech was not only about reassuring those who voted for Brexit that it will occur, it was also about taking the whole country with her.

Thus it was important she painted a vision of a global Britain, with a bright future. It is a message that needs to be repeated. Also, people will likely need to see the economy continuing to perform well, relative to the rest of the EU. The Prime Minister is clearly keen to deliver.

Brexit, it seems, does mean Brexit.

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