Article 50: What will happen to the economy now Theresa May has started Brexit?

Some analysts think sterling could fall by another 15 per cent: Reuters

Trigger is probably the wrong word.

When you pull the trigger of a gun, the weapon fires and the impact occurs a split second later.

But invoking Article 50 is more like yanking the lever of a medieval trebuchet. The missile has been launched and is sailing through the air, but it will be a while before we see where it lands. And how much damage it does.

The short-term financial implications of Theresa May’s Article 50 letter are unlikely to be very dramatic.

This date of the delivery of the Prime Minster’s missive to European Council President Donald Tusk was revealed by ministers back on 20 March, giving even the doziest of traders plenty of time to “price in” the event itself.

And the reality is that markets had already done that anyway after parliamentary resistance to Article 50’s launch finally crumbled on 13 March. That was when any doubt that we would actually end up here melted away.

The key economic significance of this moment is actually political: the weight of negotiating leverage has now been instantly transferred to the EU.

The two-year cut-off point for these talks means that the hourglass has been upturned and the grains of sand are now slipping down.

Just about every trade expert thinks this 24-month period is impossibly tight, especially given the inordinate distractions of French and German elections this year and the professed determination of the EU side to settle the issue of dividing up assets and liabilities before any discussion of a trade deal.

And whatever Brexiteers say, the UK has far more to lose economically than the EU if the clock runs down and there is no “comprehensive” trade deal by March 2019.

It’s true that the terms of Article 50 allow for an extension for talks if both sides agree to allow it. It’s even possible that Article 50 is legally revocable by the UK. But law and politics are separate things. Conservative Party internal dynamics make any extension unlikely, let alone a complete reversal.

There could be a transitional deal, enabling the existing trade status quo to continue after 2019 while the details of the new arrangement continue to be hammered out. But if this involves continued payments to the EU budget, this may prove unacceptable to the Daily Mail, a publication which, as we have seen in recent months, has a power of veto in the mind of Theresa May.

Some noisy and influential Brexiteers are even already agitating for a “no deal” departure, where Britain would simply choose to trade on the most basic of World Trade Organisation terms with the rest of the 27 members of the EU.

We should remind ourselves that this would mean 10 per cent tariffs on car exports and swingeing levies on agricultural goods sent to European markets. It would spell a complete shut-out of continental markets for UK-based banks.

There would be instant and intrusive customs checks at the border, creating long backlogs of lorries and massive disruption to UK industrial supply chains.

“A Pandora’s Box of economic consequences,” is how the Confederation of British Industry president Paul Drechsler has described it.

If a sense crystallises that this is going to be the destination in the coming months, financial markets could get volatile.

That’s why some financial analysts think sterling could have considerably further to fall against the dollar. Deutsche Bank, for one, thinks that it could dip to $1.06 by the end of the year.

Another 15 per cent decline in the currency would push up the rate of inflation still further, putting another constraint on consumer spending.

Additional business investment would probably be frozen too if we seem to be heading in the direction of a “cliff-edge” Brexit.

This would drag down the overall growth rate, possibly towards zero.

Brexiteers, emboldened by the robustness of the economy since last June’s vote when many economists warned of a recession, will dismiss this as more crying of wolf.

But they should remember that in that fable the issue was one of timing, rather than substance. The predator really did arrive in the end.