Brexit: Weekly Update

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Posted on August 16, 2016

Conservative Party
Theresa May’s government is under tremendous pressure to trigger Article 50, officially launching the two-year process of departing from the European Union (EU). Although May’s formal stance is that it will be triggered in January 2017, members of her cabinet have privately warned they will not be ready in time. The Department for International Trade lead by Liam Fox and the Department for Exiting the European Union lead by David Davis, two of the key departments leading the Brexit charge, are still in their infancy after being born in the chaotic weeks following the referendum result. David Davis has less than half of the 250 staff needed to operate his department, while Liam Fox, who will need roughly 1,000 staff members, is currently operating with less than 100.
Speculation suggests that Article 50 could be postponed to a time between May and September 2017 meaning the UK would remain within the EU until mid-to-late 2019. An explanation of this delay is partially due to political uncertainty, as France and Germany are holding respective elections in May and September 2017. The complete and continuing disarray of everything Brexit illustrates just how unprepared the Leave camp was for a referendum victory. At this point, the government has yet to establish itself as a functioning Brexit entity. They will need to develop a cogent strategy for departure after which the real difficulty will actually begin — negotiations with the EU. It is going to be a very long, bumpy road forward.

Meanwhile, internal chaos has turned to strife between fellow Brexiters Liam Fox and Foreign Secretary Boris Johnson. In a leaked letter to Boris Johnson and Theresa May, Liam Fox proposed a ‘rational restructuring’ allowing his Department for International Trade to assume jurisdiction over economic policy — one of the chief roles of Johnson’s Foreign Office. Fox’s vying for power by undermining the Foreign Office was denied by both Johnson and May. Theresa May, apparently ‘unimpressed’ by Fox’s suggestion, has ordered her ministers to ‘stop wasting time’ and to get back to work.
Labour Party
The Court of Appeal has overturned a High Court judgment, once again allowing the Labour Party to review and ban specific Labour members from voting in the party’s leadership election. The Court of Appeal ruling now allows the Labour Party to review the online accounts of some 180,000 members who joined after January 12, 2016 and were obliged to pay a ᆪ25 registration fee in order to vote in the September leadership election. If necessary, individuals may be referred to two panels to decide their eligibility.
Those who are selected for review will be suspected of not supporting party ideals, behaving in an abusive manner, or belonging to a rival political party. Last week, nearly 10,000 names were subjected to review with thousands subsequently blacklisted. As the majority of new members joining are overwhelmingly considered to be supporting Jeremy Corbyn, Labour is clearly concerned that the far-left may skew the leadership election results.

While this ruling will come as a much-needed morale boost to competitor Owen Smith, Jeremy Corbyn remains the favourite to win the campaign. These clear divisions within Labour membership may serve as encouragement for disenfranchised Labour MPs, like Owen Smith, who may push for a subsequent separation of the party.
The Markets
The pound sterling is getting battered as it hit a three-year low against the Euro, trading at noon in London today at タ1.1565. The pound is trading at $1.2879 USD, having fallen 13 per cent against the dollar since the referendum result.
As the pound plummets, the FTSE 100 earlier this morning broke a 14-month high, as approximately 70 per cent of companies listed on the index derive their income from abroad.

The Bank of England (BoE) has forecasted unemployment to rise in 2017 to 5.4 per cent and in 2018 to 5.6 per cent. In May 2016, the unemployment rate fell beneath five per cent, denoting the lowest figures since October 2005. According to the BoE’s assessment, if they had not slashed interest rates as they did at the beginning of the month, the result would have been the loss of hundreds of thousands of jobs in the uncertain years to come.

The UK’s post-Brexit economy is missing out on merger and acquisition deals, with analysts again citing political and economic uncertainty as the underlying reason. In the four weeks following Brexit, mergers and acquisitions on the European continent spiked 19.8 per cent while in the same period they tumbled 7.4 per cent in the UK. This unfortunate trend is likely to continue as polls indicate a decrease in the demand of UK assets in the coming six months.

In other news, the UK construction sector has fallen into a recession for the first time in four years. Output fell greater than anticipated to 0.7 per cent in Q2, having already fallen 0.3 per cent in Q1. The crunch looks to worsen in Q3.
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