British Prime Minister Theresa May will trigger her country’s exit from the EU on 29 March, a spokesperson for the Prime Minister has confirmed. Afterwards, the clock will be ticking, as the UK will have two years to wind up any negotiations for exit before the country’s membership ends on 29 March 2019 after 46 years. The biggest questions are what this means for the UK economy, the EU economy and whether it is a precedent others will want to follow. Some thoughts below

We all remember the doom and gloom that associated the original Brexit vote last June. There were widespread predictions of an immediate recession that never came to pass. And after the economics profession failed to foresee the economic crisis of 2007-9, the UK’s good post-Brexit economic performance represented a black eye for the credibility of the profession. But now Brexit is real. It will happen and a date has been determined for which businesses and consumers can use to make preparations. That means risk.

First, there is the currency risk. Initially, I set a downside risk number for Sterling at 1.20 to the USD. And we are just about at that level now. At that time, I wrote that the fall against the euro was more significant from an economic and trade perspective because the euro is almost 50% of the UK’s exchange-weighted exchange rate value. Before the referendum, Sterling was arguably overvalued relative to the euro at 1.30. It has since declined 12% to 1.15.

But Is the pound’s decline a positive or a negative though? So far the impact has been muted in terms of inflation. However, just today UK inflation was above 2% for the first time in 4 years. So there has been some effect.

Source: Bloomberg

The inflation path had already bottomed by the referendum according to the chart above. But the currency depreciation, post-referendum certainly accelerated the path back to 2%. Arguably we could see more depreciation now. Last week, Raoul Pal recently tweeted a chart showing a stair-step decline in sterling that suggests we could see a break below 1.20 shortly. He even thinks parity to the dollar is a possibility over the medium term. 

#GBP Sterling is on key support. It keeps breaking lower in a stair-step fashion. I still think this goes to parity vs the USD. pic.twitter.com/8VKa45bRPF

— Raoul Pal (@RaoulGMI) March 14, 2017

That picture will certainly change though, given the Bank of England’s new tightening bias. The recent UK currency and inflation path has been negative for real wages. When the employment numbers came out last Wednesday, unemployment was at 4.7%, its lowest level since 1975. But real wage growth had slowed to 1.7%.

These numbers bear watching because slowing real wage growth because of accelerating inflation will mean lower GDP growth and interest rate hikes. In fact, as I wrote on Thursday, we can already see monetary policy tightening with Kristin Forbes’ dissent on holding rates steady. 

The big takeaway: Now that Brexit is set to become reality, the feared economic weakness in Britain is more likely to develop. When the currency fell from an overvalued level after the referendum, it spurred growth in the economy. Monetary and fiscal offsets were always going to limit downside risk. The recession calls were pure motivated reasoning. But now, we have a date – and businesses can plan their investment moves accordingly. This could spell trouble for inward investment in the UK. Moreover, this is all happening against a backdrop of higher inflation, that is causing falling wage growth and may spur interest rate hikes. I don’t see a recession. But the risks to growth are clear.

Meanwhile, the EU will try to do their utmost to make an example out of Britain that others will not want to emulate. It’s not clear what impact this will have economically. But it will certainly add volatility to risk-based asset prices.