January 18, 2017 / 11:42 AM / 10 months ago

Fitch: UK Clarifies Brexit Aims; Outcomes, Timing Still Unclear

(The following statement was released by the rating agency) LONDON, January 18 (Fitch) The range of possible Brexit outcomes remains wide and the envisaged timescale for reaching a UK-EU trade agreement ambitious following UK Prime Minister Theresa May's speech outlining her government's priorities in leaving the European Union, Fitch Ratings says. But the speech did bring more clarity to the UK's final Brexit objectives. The speech is the first comprehensive, public presentation of the prime minister's Brexit priorities (although some, such as the possibility of leaving the single market, could be inferred from earlier statements). It therefore adds greater clarity to the UK's position in areas such as single market and customs union membership. When we examined hypothetical Brexit trade scenarios last month, we outlined the possible impact of a transition agreement and subsequent comprehensive EU-UK free trade agreement (FTA; Scenario 1), and of a reversion to World Trade Organisation rules followed by an eventual UK-EU FTA (Scenario 2) - see "Alternative Brexit Trade Scenarios", published on 15 December, on www.fitchratings.com, or by clicking the link below. Mrs May's priorities imply both leaving the EU Single Market and withdrawing from full membership of the EU Customs Union. But it remains highly unclear what institutional and trading relations between the UK and EU will eventually look like after Brexit. Mrs May said that the UK's priorities "cannot mean membership of the single market" but that it would seek the greatest possible access via an FTA and might try to include elements of the single market for certain industries. She said she had "no preconceived position" on the form of a UK-EU customs agreement that would not bind the UK to a common external tariff and would allow the UK to establish its own WTO tariff schedules. Provisions would be phased in after reaching agreement, with interim arrangements in some cases. This leaves a wide range of possible outcomes regarding future UK-EU trade and institutional arrangements. In addition, the two-year Article 50 negotiations relating to the UK's departure from the EU will be complex, and the aim to agree a new UK-EU relationship by March 2019 is ambitious. The final outcome will depend not just on the UK's objectives but on those of EU negotiators and member states, which may themselves vary, and the capacity for all sides to compromise. Phased implementation acknowledges the risk of a "disruptive cliff-edge," but the prime minister emphasised that this did not mean "unlimited transitional status". The pace of implementation could vary in different areas. The uncertainty for economic policy, external trade and regulatory frameworks created by June's Brexit vote are a sovereign rating weakness for the UK. Our sovereign ratings assessment is not predicated on any base case. We will continue to focus on the degree to which the Brexit process risks damaging UK medium-term economic prospects and public finances. Consumer spending has supported UK GDP since the referendum, and last November we raised our 2017 growth forecast to 1.2% from 1.0%. But we still believe uncertainty about future trading arrangements with the EU and the regulatory environment will weigh on private sector investment - business investment fell 2.2% yoy on 3Q16, according to the Office for National Statistics - while rising inflation will start to squeeze household real income growth (the ONS said on Tuesday that UK CPI rose by 1.6% in the year to December 2016, the highest rate since July 2014). Mrs May on Tuesday listed 12 priorities as the UK prepares to trigger Article 50 by the end of March. These include controlling migration, taking legal powers back from the European Court of Justice, and reaching an FTA with the EU while being free to make trade deals with other countries. <a href="https://www.fitchratings.com/site/re/891434">Alternative Brexit Trade Scenarios <a href="https://www.fitchratings.com/site/re/892023">United Kingdom Full Rating Report Contact: Alex Muscatelli Director, Sovereigns +44 20 530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Michele Napolitano Senior Director, Sovereigns +44 203 530 1882 Brian Coulton Managing Director, Chief Economist +44 20 530 1140 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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