Henderson: May’s 'hard Brexit' offers Hobson’s choice

Investors that kept abreast of the major newspapers over the past few days gleaned little new information from Theresa May’s speech. Indeed, the vast majority of the content had been gradually leaked into the public domain since the weekend. In short, the government’s key objectives – full legal sovereignty and an end to the free movement of labour – are incompatible with membership of the single market and for the most part, the customs union. As a result, the government will pursue a ‘hard Brexit’ and will attempt to negotiate a bespoke free trade agreement from outside the bloc.

May’s comments on any transitional agreement were vague; however, the broad thrust of her argument was for a phasing out of EU membership, rather than a separately negotiated interim agreement. In our eyes, this outcome gives less security to the corporate sector and somewhat weakens the government’s negotiating position. Lastly, she agreed that the final agreement will be subject to a full vote in both houses of parliament. This is largely window dressing. UK politicians will be left with Hobson’s choice* of implementing Brexit via the negotiated deal versus implementing Brexit with no deal at all. Assuming that Article 50 remains irrevocable, the choice appears to be a forgone conclusion.

The next move is in Europe’s hands

Now that the Prime Minister has given markets some certainty as to the government’s position, focus will shift to the UK Supreme Court’s decision due in the next few weeks. The weight of legal opinion suggests that the verdict from the Supreme Court will be similar to the prior judgement and that, as a result, the government will have to face a ‘rubber stamp’ vote in Parliament before Article 50 can be triggered. Given the reluctance of MPs to go against the view of the public majority, this is expected to be relatively straightforward. A more complex, and sterling positive outcome, would be that the Supreme Court requires greater input from the devolved assemblies, or further clarification from the European Court of Justice, although this is not the most likely outcome.

The next move in the negotiations appears to be in Europe’s hands. It is quite possible that we will see some counter comments from high-ranking European officials aimed at dampening expectations in the coming weeks. Furthermore, now greater clarity has been afforded to the corporate sector, the potential for more negative headlines on office relocations/staffing changes will likely increase. After the posturing has subsided, markets will begin to fixate on March and the beginning of what is likely to be a long and arduous exit process.

The enormity of the task facing the UK government should not be underestimated. With the French and German elections dominating political attention on the Continent for the next six months and an estimated further six months required to ratify any eventual deal, the UK has around 12 months to negotiate the most significant trade deal of the last 50 years. Moreover, the negotiations are likely to take place against a backdrop of rising inflation and negative real wage growth. As a result, we remain cautious on the outlook for sterling and the UK consumer.
 
*Hobson’s choice essentially means no choice other than to accept or refuse. The phrase is said to have originated with Thomas Hobson, a 17th century Cambridgeshire stable owner who told his customers they could hire the horse nearest to the stable door or none of his horses at all. It was Hobson’s choice alone which horse to put in the nearest stall.

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