Brexit: it’s only just begun...

Brexit is now unavoidable. Theresa May has officially triggered Article 50 of the Treaty on European Union, giving notification of the United Kingdom’s withdrawal from the European Union by 29 March 2019, following two years of negotiations. During this period, negotiations will cover the terms of the withdrawal (the amount of the contribution to the EU budget, rights of EU citizens in the UK and of UK citizens in the EU) and those governing future relations between the United Kingdom and the European Union (free trade agreements, passporting rights for banks, security and defence cooperation).

Formal discussions will not start before June 2017. The guidelines for negotiations by the 27 EU member states need to be agreed upon by the end of April, and will only be approved by Foreign Affairs ministers on 22 May, after the French Presidential election.

Theresa May has called an early general election on 8 June 2017 seeking to increase her government’s majority in Parliament. The aim of the election is to strengthen the government’s hand in negotiating its divorce from the EU, but by holding it before the start of discussions (instead of after their conclusion in 2020), the UK Prime Minister could gain extra leeway to compromise, in particular regarding the organisation of a transition period at the end of the two years of negotiations.

The economy with the biggest exposure to Brexit is the UK, because over 52% of its goods exports (1) and 40% of its services exports (2) go to the EU. In contrast, only 6.5% of the EU’s goods exports (1) and 9% of its services exports (2) are to the UK. However, some countries, such as Ireland, Cyprus and Malta are more exposed to the risk of a slowdown in the UK economy because of their considerable trade ties with the country.

So far, the UK economy has withstood the shock of the referendum well, achieving growth of 1.8% in 2016.

For 2017, Societe Generale’s economists forecast a slight slowdown in growth to 1.6% owing to the uncertainties that will weigh on investment, while rising inflation caused by the fall in Sterling has already begun to weigh on consumer purchasing power and spending. However, it will only be from 2019-2020, when Brexit becomes a reality, that its negative impact is likely to be fully felt.

(1) Source: Eurostat 2016 goods exports data.
(2) Source: Eurostat 2015 services exports data.