logo-loader

Brexit negotiations to ‘drag on' into 2019

Last updated: 07:20 29 Dec 2016 GMT, First published: 07:15 29 Dec 2016 GMT

london skyline
Pickering doesn't expect the negotiations to impact UK and European markets much

Berenberg economist Kallum Pickering reckons Brexit negotiations are likely to drag on for more than two years but the market risks from this are likely to be relatively minor.

He gives Proactive Investors a wide-ranging synopsis of his take for 2017 in terms of politics, the markets, and general economics.

Of course, Brexit has been the UK talking point of 2016 and will continue to be so and Pickering reckons Article 50 (the start of the withdrawal process) will be triggered by March next year regardless of the outcome of the recent Supreme Court hearing.

We are then looking at 18 months of negotiating between the EU and the UK, after which agreed terms will need to be ratified both here and in Brussels - which will likely lead to six further months of debate, he said.

"There are real risks that those negotiations could drag on for way more than two years," reckons the economist.

"It is unlikely that the UK will want an off-the-shelf model - a Norway deal or a Swiss deal," he added.

WATCH: Berenberg analyst gives his predictions for 2017

"They will probably try to negotiate something bespoke - basically figuring out the balance and the trade-off between reducing migration and gaining market access," he points out, saying the EU will probably say no, hence the delay.

But markets here, and in Europe, as seen this year, are unlikely to flinch much from this, he suggests, since the UK economy has shown itself to be resilient despite the doom mongering. European equities have also held up.

In terms of a how it will all land, Pickering reckons both sides will need to compromise.

Despite the posturing, he says, ultimately the UK and Europe will benefit from a Brexit with good economic terms.

UK heavily dependent on Europe

"The UK is heavily dependent on Europe - earns around 13% of its GDP from exporting to the EU.

"The EU earns around 4% of its GDP exporting to the UK. There's lots of good reasons why they should end with a good Brexit, on good economic terms. So we'll probably see things pretty rocky at the start and then they'll soften."

He reckons Britain won't reduce migration as much as Prime Minister Theresa May is suggesting now and eventually there will be some kind of bespoke deal, which will probably hinge on something concerning the politically sensitive services sector.

Indeed, the major risk area from Brexit is that important UK financial services sector, from which Britain earns around 2% of its GDP (gross domestic product) by exporting those to the EU.

The fear is losing financial passporting, which will almost certainly happen if the UK refuse to have free movement, reckons Pickering.

Another risk factor next year is of course the surprise election of Donald Trump as US President - a fact that does not all seem to have spooked share markets, in fact they have risen,

Pickering though says we should be a little cautious in interpreting that response.

"The post-election rally seems to be focusing on the economic and reforms and fiscal reforms which should lift US growth," he said.

"The US is the largest economy in the world. It has a huge domestic market and certainly for countries in Europe which are almost twice as exposed to the global economy and its trade flows as the US is, anything that leads to an increase in demand for the US is probably good for Europe too."

Pickering's concern is the market reckons Congress will let him pass his economic policies but rein him in on some of the "scary" things he's said on trade and foreign policy.

"I think we have to be careful that this rally that we have seen after Trump isn’t pared with volatility heading into next year as we learn about some of his other policies..," he says, adding that markets hate political uncertainty.

The economist is fairly laid back about the German and French elections next year, with Merkel in Germany sorting things out and the possibility of positive reforms coming from the French candidate François Fillon.

"The major risks emanate from the US, uncertainty around Brexit; if the UK and the EU bump heads and of course every once in a while we get a flair up of emerging market risks."

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

1 hour, 35 minutes ago