UK economy chiefs stress Brexit perils after talks start

Britain's Finance Minister Philip Hammond says Britain needs a transitional Brexit deal for business "to avoid unnecessary disruption and dangerous cliff edges". (AFP/Paul ELLIS)

Finance minister Philip Hammond and Bank of England governor Mark Carney stressed the perils of an abrupt divorce from Britain's biggest trading market, seeming to contradict some of the "hard Brexit" rhetoric espoused by the government at the start of negotiations with the EU on Monday.

Possible Brexit options. (AFP/Gillian HANDYSIDE)

Carney even mocked Foreign Secretary Boris Johnson's argument that Britain can have its cake and eat it by quitting the European Union but still retaining the benefits of membership.

"Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption," Carney said in an address to bankers, which was postponed from last week by a deadly fire in a London tower block.

"Depending on whether and when any transition arrangement can be agreed, firms on either side of the Channel may soon need to activate contingency plans," he cautioned.

The warnings came as Britain's top business alliance warned that domestic political turmoil and Brexit's impact would hurt growth in coming years.

The economy will expand by 1.6 per cent this year before slowing to 1.4 per cent in 2018, according to upgraded forecasts from the Confederation of British Industry, after 1.8 per cent growth in 2016.

The CBI on Monday was one of five major British business bodies that called in a letter to the government for continued access to the European single market until a Brexit agreement has been sealed.

At Monday's formal start of the EU negotiations, Brexit minister David Davis stressed that Britain would have to quit the bloc's common market and customs union to ensure the return of full sovereignty.

But there was also a climbdown from Davis when he agreed with his EU counterpart to first discuss divorce issues before negotiations on a future Britain-Europe trade deal can start.

'AVOID CLIFF EDGES'

The manoeuvring came after Conservative Prime Minister Theresa May emerged wounded from a general election setback this month, which has strengthened the hand of cabinet moderates such as Hammond.

In his own speech to bankers at London's Mansion House, the chancellor of the exchequer agreed with Carney on the need for a transitional deal for business including financial services "to avoid unnecessary disruption and dangerous cliff edges".

Ensuring that Brexit does not imperil British jobs or impoverish living standards "will require every ounce of skill and diplomacy that we can muster", Hammond said. "Yesterday was a positive start. It will get tougher. But we are ready for the challenge."

Among the thorny issues to be thrashed out are Britain's estimated €100-billion (US$112 billion) exit bill, the rights of EU citizens living in Britain, and the fate of the northern Irish border between the United Kingdom and the Republic of Ireland.

Brussels has made the future of the three million EU citizens in Britain and one million Britons in Europe a priority, insisting they should be allowed to keep their rights to live, work, study and claim welfare benefits.

May will join an EU summit on Thursday and, according to Davis, will set out her plans on the residency issue to the 27 other leaders.

May is reportedly set to make a "big generous offer" but the EU signalled on Tuesday that its gratitude would be in short supply.

"For us it's not a question of generosity, it's a question of continuity and fairness," Stefaan De Rynck, a senior aide to chief EU Brexit negotiator Michel Barnier, said at a seminar in Brussels.

With EU citizens already guaranteed fundamental rights across the 28-nation bloc, De Rynck said "there is nothing particularly generous about this issue".

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