Future State of the UK
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Supreme Court Ruling
On Tuesday 24 January 2017, the Supreme Court of the United Kingdom (UK) backed an earlier High Court ruling that triggering Article 50, a process that gives formal notification of the UK's intention to leave the European Union (EU), cannot be exercised using the Royal Prerogative (powers handed to ministers by the Crown) but that an act of Parliament is required first. Whilst this was widely anticipated it is unlikely to derail the UK Government's timeline for triggering Article 50 by the end of March 2017. What it does do is remove some of the uncertainty around the process itself, particularly as the Supreme Court also ruled that UK ministers were not legally compelled to consult devolved legislatures before triggering Article 50. Financial markets reacted positively as a result.
The UK Government immediately announced that it would table a bill with the intention of obtaining approval from both houses of Parliament to trigger Article 50 within a timeline required to meet the Prime Minister's deadline of the end of March. Whilst there is expected to be a period of debate in Parliament, the enabling bill, the wording for which was published on 26 January, is not expected to face a significant hurdle from the Commons. The bill's passage through the House of Lords is expected to be somewhat rockier, with pro-Remain peers seeking to table significant amendments, but it is ultimately expected to also pass through this legislature.
The Prime Minister has also committed to publishing a White Paper alongside the enabling bill to set out her plans for the UK's exit from the EU, although it is currently unclear whether it will provide significant additional information to that provided in her speech of 17 January, further analysis of which is included in the update below.
Lutz Engberding, Fixed Income Product Specialist, Insight Investment
On 17 January UK prime minister Theresa May delivered the most detailed statement on her plans for the UK's withdrawal from the EU before the start of formal negotiations.
As expected, May pledged to quit the single market and also made clear that there would be no more contributions to the EU budget (apart from specific projects that could be funded). On the subject of a customs union, she explained that it could take various forms but essentially said she would seek a customs agreement with the EU that would allow the freest possible trade deal. In its current form, the customs union prevents the UK from making its own trade deals with other countries. This should change, enabling the UK to negotiate its own deals with major trading partners. May also said she wanted a phased implementation process to give businesses time to plan.
Importantly, May confirmed that both houses of Parliament would vote on the final Brexit deal. While one would expect Parliament to back the deal, it introduces another element of uncertainty. If the deal May ultimately negotiates is deemed to be unpalatable from the UK's perspective, it is plausible that Parliament rejects it (although the process of withdrawal may be unstoppable at this stage).
Market impact was relatively muted. UK gilts closed marginally lower on the day and European credit markets were largely unchanged. Sterling shot higher but remains at levels seen at the start of the month. The currency is, however, still significantly depressed compared to pre-UK referendum levels and this will have important implications for inflation in the UK.
The sharp fall in sterling since the UK referendum in June means that UK headline inflation is likely to pick up meaningfully over the next year. Rising input prices will lead to higher consumer prices and squeeze margins at UK companies reliant on imported inputs.
The fall in sterling does, however, positively benefit multi-national companies domiciled in the UK, which are likely to benefit from a rise in the value of their overseas income. The Bank of England (BoE) made sharp upward revisions to its inflation profile in the November Inflation Report as it expects faster pass-through of import prices to consumer inflation, although inflationary pressures are likely to be weaker at the end of the forecast period due to a larger output gap than initially predicted.
The UK economy closed out 2016 on a solid footing. Initial fears for a material drop in economic activity following the UK referendum on EU membership have failed to materialise, at least for now. Economists currently predict slower, yet positive UK growth over the next two years. Risks remain, however, as the UK's exit from the EU could lead to a structurally lower growth profile for the UK and adversely impact certain sectors.
The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance. Unless otherwise attributed the views and opinions expressed are those of the fund manager at the time of publication and are subject to change.