Brexit in the legal landscape: what does this mean for law firms? by Sponsor Barclays

Professional services remain on the Brexit back burner

 

 

When Barclays started to write about Brexit back in 2015-2016, our experts believed it to be a surmountable headwind for the UK. Two years on, do Head of Investment Strategy, Will Hobbs, and Head of Government Relations, Peter Gordon, still agree?

 

In spite of lengthy Brexit negotiations, UK companies putting investment plans on hold and plenty of political manoeuvring within the Conservative Party, Barclays’ Will Hobbs and Peter Gordon agree that the resilience of the UK’s economy and stability of its political landscape are commonly underestimated.

 

The UK is not a corporate community that has grown up behind barriers or protectionism, stresses Hobbs. “Essentially the companies operating in the country have been forged in the white heat of global competition. As a result, they tend to be more resilient and adaptable than the caricature.”

 

While both domestic companies and those with international exposure are putting their investment plans on hold, Hobbs says the UK makes a very interesting place to invest in once the ‘considerable’ dust from Brexit settles.

 

“Although Brexit is viewed by some as a mess, we still live in a country with a rightly famed legal system and much envied institutional context. These factors, alongside a likely still growing and flexible workforce will continue to be part of the long term attraction of the UK economy.”

 

Hobbs predicts that, post-Brexit negotiations, much deferred investment will be syphoned into the UK. “If the scenario becomes less ‘hard Brexit’ and the ‘no deal is better than a bad deal’ mantra is dispensed with, UK businesses may become more confident in investing, and that will be more beneficial for financial services.”

 

Banks are providing steady leverage into the economy but it’s “just not kicking off as it is elsewhere,” says Hobbs, who adds that, while Brexit is not a disaster, the comparative lag in the domestic economy compared to global peers is not currently giving the central bank much opportunity to raise rates.

 

“The Bank of England needs to reload its monetary arsenal in time for the next recession. However, unhelpfully, the UK economy is certainly more sluggish for now than it might have been if Brexit hadn’t happened.”

 

Is a recession imminent?

 

Recessions are hard, often impossible to predict, but Hobbs stresses that the most important consideration for businesses and investors is that growth is the norm, not the exception.

 

“Though recessions are often very hard to accurately predict, we can take solace in the fact that over the long sweep of history they seem to be getting significantly more infrequent and less severe, with the last economic bloodletting in 2007/08, the exception not the rule.”

 

“There are nonetheless two indicators that can help signal recessions; they’re not infallible but they are reasonably reliable.”

 

One is the monthly Institute for Supply Management (ISM) survey, which asks US manufacturing businesses questions about production, new orders and employment. The answers are distilled into a single number, the Purchasing Managers’ Index (PMI).

 

A PMI above 50 indicates the US, and therefore the global economy, is in expansion, explains Hobbs. Below 50 implies it’s in retraction. “You typically have a two-quarters lead before you hit recession, while below 48 tends to indicate it.” June’s PMI of 60.2 suggests that the economy is in strong expansion.

 

The second indicator is the yield curve showing the difference between 10-year and two-year interest rates. It has a reasonably reliable track record predicting every recession in the US since the 1950s (with a false alarm in 1967). When short-term interest rates go above long-term interest rates and the yield curve inverts that tends to indicate there’s a year to a year-and-a-half before recession says Hobbs. “Right now, it’s not inverted although it is narrow. The economy has got room to run in our view. Something can always come out of leftfield of course, but the chances of that happening are more or less the same in year 10 of an economic cycle as they in year 1.”

 

Trump’s trade tactics

 

Unsurprisingly the Trump administration poses one of the biggest potential threats to the global economy, specifically with the initiation of a trade war with China and reciprocal import tariffs.

 

Hobbs describes this as typical ‘game theory’ with the US viewing China as a prize that will fold and capitulate if threatened by the US often enough. The presence of midterm elections in November is likely to keep this US administration from moving too far down a path that would surely be tantamount to economic and political suicide Hobbs said.

 

Europe, Hobbs argues, could even benefit long term as substitute goods could come from the region “which looks a more politically reasonable, stable land mass.”

 

Stable politics in the UK

 

With Brexit negotiations formally ending at midnight on the 12 October 2018 in preparation for the UK’s departure from Europe on 29 March 2019, it is highly likely Prime Minister Theresa May will not be presented with a leadership challenge during that time.

 

“If there is a no confidence vote, she might actually survive as the rump of the party supports her,” says Peter Gordon, Head of Government Relations, Barclays UK.

 

When pens are put down this Autumn, Gordon anticipates the unfolding of multiple parliamentary dramas in Q3 & Q4, and Q1 of next year, as the whole Brexit Bill is debated and ratified in Parliament.

 

Post-Brexit transition

 

Could Leader of the Opposition Jeremy Corbyn force a General Election during this time?

 

Gordon says it’s a possibility but includes a caveat. “My best case is that pragmatism will rule the day. It has done over the last two years and despite all these dramas we will find a solution and begin the 21-month transition period.”

The conundrum comes if the transition period is extended. This, says Gordon, is a Brexiteer’s worst nightmare.

 

Prevarication would be expensive with the UK still paying in subject to all EU rules. “This is how this whole story might play out,” says Gordon. “We’ll see transition extended, though theoretically it can’t go beyond June 2022 as that’s the next (scheduled) General Election and that’s as far as Theresa May can be involved in terms of her negotiations.”

 

Speed is of the essence. European institutions change in 2019 with European Parliament elections, meaning a new president of the European Central Bank, the European Commission and the departure of European Commission Chief Negotiator, Michel Barnier.

 

This will create a whole new dynamic and at the end of that 21 months the UK Withdrawal Agreement needs to be ratified by the UK Parliament, the European Parliament and European Council and every one of the 27 European member states.

 

What’s left to discuss?

 

Two years after the referendum the UK is still discussing what the future trading relationship with the EU should look like.

 

The UK cabinet is at loggerheads over two preferred customs models, explains Gordon. The first is a customs partnership where the UK collects tariffs for EU goods that pass though the UK. This has been criticised for its admin heaviness and complicated bureaucracy, however. The other is that of maximum facilitation with a reliance on technology solutions. Gordon describes this as ‘the utopia of frictionless trade’ using CCTV and pre-registered trading. Neither of these options, he stresses, have been tried or tested before.

 

The other issue is the challenge of Northern Ireland and maintaining the principles inherent in the 1998 Good Friday Agreement within the context of Brexit.

 

With the Irish question and trade monopolising Brexit negotiations, the granularity of the future of financial and professional services has been left on the back burner, says Gordon.

 

“Services are more complicated when it comes to future market access and the capital markets and the rest of the EU. It’s a tough negotiation and we’re arguing for mutual market recognition and aligned mutual regulatory regimes, but we’re not getting much traction on that. There’s lot of talk of equivalence where the UK from a regulatory point of view is an equivalent regime to Europe. But it is Europe setting the rules and the UK hasn’t been conferenced into that.”

 

While much progress has been made on Brexit, Gordon remains pragmatic: “Nothing’s agreed until everything’s agreed.”

 

Key takeaways

  • The UK economy is not recessionary.
  • Deferred investment predicted to return to the UK when Brexit concludes.
  • The future of financial and professional services has been put on the Brexit negotiation back burner.
  • The EU dynamic changes in 2019 with European Parliament elections, a new President of the European Central Bank, the European Commission and the European Council.
  • The adaptability of the UK economy is underestimated.
    Paul Jarrett

 

 

To find out how we can help your business contact:

Paul Jarrett, Relationship Director

MOBILE: 07917 503485 | EMAIL: paul.jarrett@barclays.com

 

The views expressed in this article are the views of the author(s) alone and do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in the third party guides or articles and no warranties or undertakings of any kind, whether express or implied, regarding the accuracy or completeness of the information given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed. Barclays Bank PLC is registered in England (Company No. 1026167) with its registered office at 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority (Financial Services Register No. 122702) and the Prudential Regulation Authority. Barclays is a trading name and trade mark of Barclays PLC and its subsidiaries. July 2018

 

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