How did the U.K. get to Brexit and what’s been the reaction there and abroad? Those are the questions considered by our panel of leading analysts in this latest addition to our multi-part video series exploring Brexit’s potential challenges and opportunities for businesses on either side of the Atlantic. This clip features insights from Wells Fargo economist Jay Bryson, Domtar Corp. CEO John Williams, British Consul General Pilmore-Bedford, and Bond Dickinson attorneys Jonathan Blair and Francesco Lamana.

Jay Bryson: So, our view is that the UK is looking at a modest recession starting later this year.  We don’t have a lot of hard data on that just yet.  We have so-called soft data, surveys, business confidence, things of that nature.  But essentially the idea is the investment climate in the UK has taken obviously a hit.  Every relationship between the European Union has to be obviously renegotiated here, and you do hear anecdotes of businesses of putting investment plans on hold.  And so I think you’re looking at a somewhat of a, we’ll get a modest sort of recession.  This is not a Lehman sort of meltdown.  I’m over there. It’s probably you know peak to trough decline in real GDP of maybe 1% or something like that lasting a few quarters but you know in general I think you’re looking at a modest recession.

Mark Walker: And how has that changed from the forecast from say six months ago?

Jay Bryson: So, before Brexit we had continued growth there.  The UK has been growing roughly about 2% in real terms over the last few years, maybe a little bit north of that, but you know up until June 23, we had continued growth there and obviously changed that. 

Mark Walker: So the vote has occurred and I think just to set the ground work, Jeremy, what’s sort of the timeline, what’s the next action from here that’s got to occur?

Jeremy Pilmore Bedford: Right, well the, obviously we had the votes.  There was immediately a political shock because that was unexpected results.  The opinion polls right up to the 10:00 evening when the polls closed showed a small lead for the remain camp, but we didn’t get that so then we had a period of 2 ½ years, 2 ½ weeks of political uncertainty where we didn’t know who are going to be Prime Minister, what direction the country was going to take.  But very quickly the British political system came together, and we had the appointment of Theresa May is our new Prime Minister and the formation of the new government and I think that in many ways, restored some confidence.  It showed that the British political system is extremely robust and extremely able to absorb a major shock like this, probably the biggest political shock to the British political system since the Suez crisis in the 1950s.  The next step will be for the government to actually to articulate without giving away redlines what our overall negotiating position will be for leading the European Union, and I expect that to be articulated sometime in the early autumn, so around September, October, maybe by the conservative party conference at the beginning of October.  The government will then move forward to trigger Article 50 which is the article for exiting the European Union.  What I’ve heard so far is that’s unlikely to be triggered until the beginning of the new year.  Some commentators have talked about it perhaps even being deferred until after the French elections which I think are around March, April time because that takes a level of uncertainty out of the equation.  So that will be the next series of steps forward.  Often when I’ve been asked about political uncertainty and economic uncertainty about Brexit, I sort of described it as sort of funnel.  We were at the maximum point of uncertainty the day after Brexit.  With the formation of the new government we moved somewhere down that funnel so that the level of uncertainty was narrower. As we move forward over the next 6-8 months in particular I think that uncertainty will narrow considerably and then we’ll have the two years of the negotiating process and it will eventually taper away.

Mark Walker: Gotcha.  And is there any possibility that Amendment 50 won’t be enacted?  Are there any court cases right now and Francesco or Jon?

Francesco Lamanna: The Article 50 scenario, there’s a bit of an unknown quantity really.  It’s, in terms of exactly how it’s going to be triggered, I mean the requirements is that it needs to be triggered in line with the constitutional requirements of the member state and the government has taken the view that it could that by exercising the medieval right under constitutional law of the royal prerogative.  Now there is some debate as to whether this is some sort of thing where it’s appropriate to have the royal prerogative.  I mean generally it is limited to areas of foreign policy so arguably it would cover that, or where there’s a very strong kind of counter to that to say that well, actually this is something that cannot simply be decided by the government, but actually has to be put to Parliament for consultation and a vote and that it’s something that needs to be debated more widely.  So the consequence of that, you have judicial review of the government decision to exercise the royal prerogative as a means of triggering Article 50 and it’s expected that the high court will hear that sometime in mid-October, and the expectation then being that whichever way it is decided that the losing side will most likely want to challenge that and raise it to the Supreme Court so it’s expected that the Supreme Court will probably hear that decision sometime before Christmas of this year. 

Jonathan Blair: Yeah, I think as we heard earlier, the initial response was one of real shock.  I mean let’s be clear about this.  Nobody really expected to see this result in the UK, if you talk to most business leaders, there was very little by way of contingency planning so I entirely agree this was a real shock and I think a lot of people went into a certain, it felt a little bit like a sense of mourning actually.  Of course, we all know that the markets don’t like uncertainty so of course inevitably what that meant early on was that immediately plans were put on hold so certainly in the first couple of weeks particularly as we’ve heard with the political uncertainty, plans were without a shadow of a doubt, put on hold.  But since then, I would say what we’re feeling on the ground, what we’re seeing on the ground, is very mixed response so M&A activity actually is pretty steady.  Real estate market which is the market that was hit most during the post-Lehman recession has felt a bit of activity increase and I think Sterling we’re going to come on to that mark later.  The weak Sterling position is going to act as sort of a shock absorber for the economy.  Now frankly is a good time for investing in the UK and although the real estate market did slow down initially, what we’re seeing is transactions being put on pause but falling away completely and what it looks like is this result, the referendum, the decision to leave Europe is being used as an excuse to chip the price.  So activity is continuing.

Mark Walker: Great, thank you, Jonathan.  John, you’re running a multi-billion dollar corporation, what was your reaction and thoughts immediately after the Brexit boom?

John Williams: Well, I live in a pro-Brexit household so I shall have to come clean on that right away so, I mean, the implication to us is fairly simple.  We import into the UK just about $100 million worth so it’s not enormous.  We’re importing actually from the U.S..  We’re importing from Sweden.  We’re importing from Spain.  So patently our earnings on that have just gone down by about 10-15%.  So you know straight off the top, straight to the bottom when it’s a currency move.  I’d love to understand what the contingency plan might have been by the way.  I’m not sure I would have known what to do even if I saw it was coming.  So I think you have kind of a binary decision to make actually, which is if you believe low Sterling for quite some time, it’s still a market of 63 million people, if you’re a consumer products company.  You know, should you be thinking actually about getting inside that because this could be a very competitive manufacturing place for a number of years.  You’re then obviously worried by the fact about how will they negotiate Europe in terms of trade agreements.  So I think what you’re thinking about, well, certainly what we’re thinking about, I can only speak for us, is with planning and there are plenty of plans, but what we actually do I think is with sitting quietly and waiting.  However, what we are doing is we’re telling and negotiating with our UK customers that we need the price to go up.  So I do think you know, anybody importing into the UK, I do believe one of the impacts of this is definitely going to be the UK is going to import inflation.  I can’t see how they can avoid that, provided the negotiating powers with the supplier.  If it’s with the customer, that’s slightly different so that’s what we’re doing currently.  

View Part 2 - Brexit: Currency Issues and Inflation

View Part 3 - Brexit: Outlook for the EU and Impact on the U.S.

View Part 4 - Brexit: U.S. Opportunity in the U.K.

View Part 5 - Brexit: The Impact on Mergers and Acquisitions

View Part 6 - Brexit: What the U.K.’s Exit Might Look Like

View Part 7 - Brexit’s Potential Impact on Corporate Passporting and the Banking Industry

View Part 8 - Brexit’s Potential Impact on Corporate Passporting and the Banking Industry