What's going on?
British and European Union negotiators have agreed to a 21-month “transition period” following Britain’s formal withdrawal from the EU in March next year – and the British pound rose as investors took that to mean the process is going relatively smoothly.
What does this mean?
News of a transition period is, on the surface at least, a welcome development for businesses and investors in Britain. Both have hoped to avoid a “cliff-edge”, no-deal scenario after Brexit takes effect. The downside is that this isn’t exactly the transition that many businesses were calling for: most wanted a gradual segue into the brave new UK-EU relationship, whereas this deal appears to be more like an extension of the deadline for thrashing out just how that long-term future will look.
Why should I care?
For markets: The pound has recovered a good bit of last year’s weakness.
The pound, which jumped about 1% on Monday, is up about 15% from its low versus the US dollar (hit about a year ago). It’s also risen versus the euro since last year’s lows. Broadly speaking, this reflects growing confidence from investors that a deal will (eventually) be agreed with the EU that isn’t too punitive. The point? The value of the pound is reflecting a relatively optimistic outlook. More good news (for UK businesses, at least) would likely push it up further – but any significant setbacks to the presently envisaged path would probably lead to another selloff.
The bigger picture: Uncertainty is bad for business.
Businesses can generally adapt to most conditions; but when the future is foggy, they’ll typically hold back from investing as much as they otherwise would. Why explore opening a new business line if that industry isn’t part of a future trade deal with the EU, for example? A transition that simply extends the negotiating period runs a big risk that businesses will further delay their investment spending, thus restricting economic growth.