We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie notices.

Brexit – has the fog lifted?

Home / Press Centre / Brexit – has the fog lifted?

Neil Williams, Senior Economic Adviser
06 February 2017
ArchivedEuropean Equities

After Theresa May’s explanation of the Brexit process and The Supreme Court ruling, the UK’s intended departure date and destination look clearer. But, in his latest Ahead of the Curve monthly, Neil Williams, Group Chief Economist at Hermes Investment Management, believes the largest uncertainty now is the length of the journey ahead. Our negotiations, he argues, could stretch well beyond the two years assumed by Article 50.

Buckling up for a long journey...
Mrs May says no other countries’ membership models will be sought, which seems to rule out Norway and Switzerland’s associate memberships. Yet, her desire to “pursue a bold and ambitious free trade agreement” with the EU suggests she could yet behind the scenes negotiate to maintain access to - but no longer full membership of - the tariff-free customs union.

Securing access might be the ‘best of both worlds’. Turkey and Canada have enjoyed customs-union access with the EU without membership. Canada’s in 2016 came after seven years of negotiation. And, needing sign-off by all EU states, it was stalled by the Belgian region of Wallonia! Chancellor Hammond’s threat that without access, much lower UK corporate tax rates will be needed to maintain FDI and competitiveness (which risks a European ‘chase to the bottom’) looks an early stick to achieving similar privileges.

Access to the customs union could be the best of both worlds...
Even this will need time. First, the deal when struck will need Parliamentary approval, and then be subject to a ‘phasing in’ period (Mr Hammond has suggested two years) to allow firms, consumers and officials to adjust to the new arrangements. A second independence referendum in pro-EU Scotland, though not precluding Brexit, could also provide an extra hurdle to completing it before the General Election scheduled for May 2020.

Second, the UK is relying on a cooperative sign-off by its 27 EU peers. The only real precedent we have is Greenland’s exit in 1985. This was a ‘soft’ exit, but it took three years. We, larger and 44 years entwined in the EU, will need longer.

We’re opening the ‘trapdoor’ in a highly-charged political year. Voters facing national elections in Germany, France, The Netherlands and probably Italy may want to approach it as protest to six years of euro-zone austerity. In the ‘peripheral’ economies, reform fatigue and populist parties are building. Therefore, incumbents may be reluctant to condone an easy UK exit that puts its economy ahead of their own.

And with large members like Germany and France so far down the EU ‘path’, the threat of exit probably applies more to the newer entrants, like Croatia and central/eastern Europe whose EU pedigree is less engrained.

Third, EU law forbids trade-deal ‘bigamy’, in terms of enacting agreements elsewhere while still an EU member. This prevents a quick compensating tie-up with the US for example. So, a challenge is to remain close to the European negotiating table to maintain the best trade and regulatory deals for services, which account for 80% of the UK’s gross value added. This makes it more ambitious than a Canada-style deal.

Governor Carney’s ‘blind eye’ would be akin to King’s when the CPI breached 5%...
Which leaves the BoE watchful that a weaker pound doesn’t pump inflation. Should protectionist forces in the US and Europe build, which seems likely, inflation will reappear. But, it will be the ‘wrong sort’ – cost-push, led by tariffs, goods and labour shortages, rather than ‘feel-good’ demand-pull. Central banks will then have to ‘turn a blind’ eye as economies stagflate.

Our simulations show at current USD/GBP and oil prices, RPI inflation this April lifting to +3%yoy, from January’s +2½%yoy. But, combinations of a weaker pound and/or higher oil could feasibly take the RPI to +4%yoy. This would be a five-and-a-half year high. In each case, the CPI breaches its +2%yoy target in April. Further GBP weakness and/or oil strength would push it up to +3%yoy.

But, should that occur, we still doubt the MPC would react, given the feared hit to growth and the housing market. This would be akin to the ‘blind eye’ governor King turned in 2011 when the CPI climbed to +5.2%yoy as the pound weakened and energy/food prices rose.

And, with the Treasury also loosening the fiscal reins, this has further implications for the pound. No major economy has in the longer-term net loosened its overall (monetary and fiscal) stance more than the UK (see chart 1). And, given the subsequent inflation premium, there’s little coincidence that those running the more expansionary policies like the US/UK have generally sustained the weaker currencies (see chart 2).

The prospect now for UK policy to stay loose, Brexit negotiations stretching beyond the two years hoped for, and USD strength as the Fed raises rates and protectionism and repatriation beckon, should leave the pound vulnerable.

So, we could be choosing one of the worst times to negotiate an exit - given the anti-establishment feeling in the US and Europe’s election calendar. And, we’ll now have to compromise if we want tariff-free trade - after all, this is our second European ‘divorce’, after the ERM in 1992. So, any tie-ups in the future - with Europe or elsewhere - will probably come ‘with strings’. A bit like EU membership then!

Chart 1. No major economy has loosened policy more than the UK
Shifts since 2000 in real rates (using CPI, 3m Libor), and cyc adj budget balances

Source: Hermes Investment Management, based on OECD projections, IMF & Bloomberg 

Chart 2. Which helps explain the pound’s relative weakness
Trade-weighted exchange rates, re-based to Q1 2000 (= 100). Quarterly data

Source: Thomson Reuters Datastream



Share this post:
Neil Williams Senior Economic Adviser Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
Read all articles by Neil Williams

Find posts by author

  • Alex Knox, ACA
  • Andrew Jackson
  • Andrew Parry
  • Claire Gavini
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Eoin Murray
  • Geoffrey Wan, CFA
  • Harriet Steel
  • Ilana Elbim
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • archived
  • european equities

Press contacts