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Several nations called on Britain during weekend talks on the world economy to explain how the politically fraught Brexit process will unfold in order to avoid adding a new drag on the long and slow recovery from the financial crisis.
“It’s right at the top of the agenda here at the G20,” Hammond said at the end of the two-day meeting of the Group of 20 leading economies in the Chinese city of Chengdu. “It’s a new factor affecting the global economic outlook and it has increased the uncertainty which the world economy faces.”
Britain was plunged into its biggest political crisis in decades by the June 23 Brexit vote and so far it has resisted calls from some other EU countries to trigger quickly the two-year process for negotiating its exit from the bloc.
Prime Minister Theresa May, who has been in her job for less than two weeks, traveled to Germany and France last week to explain why she needed time to come up with an exit strategy.
The EU’s top economic official, Pierre Moscovici, said the bloc understood that Britain should not be rushed but “at the same time… let’s not waste time, let’s not have too much uncertainty, let’s act and choose as swiftly as possible.”
Hammond told reporters on Sunday the two-year negotiating period, once launched, represented “quite a tight timescale” and Britain needed to go into it with clear objectives. “We have to do that before the start of the process because when we serve that notice, we need to hit the ground running,” he said.
But Hammond also showed he was aware of the need for some clarity on Brexit: “What will start to reduce uncertainty is when we are able to set out more clearly the kind of arrangement we envisage going forward with the European Union.”
“If our European Union partners respond to such a vision positively – obviously it will be subject to negotiation – so that there is a sense perhaps later this year that we are all on the same page in terms of where we expect to be going, I think that will send a reassuring signal to the business community and to markets,” Hammond said.
May has said she does not plan to launch the formal negotiation period this year. It remains to be seen if other EU countries would enter informal talks with Britain before the formal negotiations, something they have previously ruled out.
Government, Bank of England have to be ready
Financial markets have stabilised after the initial shock of the referendum result which saw the value of the pound plunge by more than 10 percent and trillions of dollars wiped off stock markets worldwide. But economists are expecting Britain to fall into a recession, according to a Reuters poll.
Hammond said he did not think that a survey of British businesses published on Friday, which showed the sharpest fall on record in a purchasing managers index, was a sign that the economy was in already in a recession.
“What it does is underscore the hit to confidence,” he said.
Hammond warned that Brexit-related volatility in markets would be a risk throughout the two-year negotiation period.
“We have to be ready as government, the Bank of England has to be ready as monetary authority, throughout that period to respond to any instability created by that uncertainty and to ensure that the economy continues to operate smoothly,” he said.
The BoE is expected to cut interest rates and possibly announce more stimulus measures on August 4. Hammond has said he could ease fiscal policy in the autumn if more help is needed.
Asked about a comment he made on Friday, that he might “reset” fiscal policy to cope with the Brexit fallout, Hammond said Britain’s still high levels of debt meant it needed a new framework on its public finances to give clarity to markets.
“What that framework will look like will depend on the decisions we make about whether or not any fiscal stimulus is required on the basis of the data we will by then have available,” he said.