There are other downsides though.
For one thing, the German surface fleet is going to basically not even exist. That's going to make Norway and such (and other such operations) much more difficult in ways U-Boats can't help.
But really the main issue is this telegraphs German intentions in a BIG way different then OTL. In OTL Hitler's biggest issue was the USSR and most of his plans (if they existed) were aimed toward Stalin. France and the West were honestly sidelights to him, minor detours on the way to the mystical eastern crusade against the Jews. This POD suggests a full change, one which the UK will notice and change their own OTL plans to react to.
Quite so. Which IF WW2 goes as OTL up to April 1940, would make it easier for the UK to bully Norway into ceasing to allow Swedish iron ore to be exported from Narvik in winter. And complicate (i.e. make almost impossible) any German attempts to conquer Norway as OTL. (It might be able to take control of the southern portion to shut the Baltic approaches
It would certainly alter the British establishment's attitude towards Germany. Which is, I think, what
@steel_captain wants us to discuss as much as, or instead of, the changes to British rearmament choices we have already outlined.
My guess is that the British would be much less sympathetic in 1938 to German wishes. The UK might seek to work with Mussolini's Italy to prevent the
Anschluss, making concessions over Abyssinia. Possibly fruitless of course, in which case I think cooperation with the French over a new BEF and united front to resist further German annexations. So, no unilateral offer of concessions at Munich. The War might occur then - or the German Army could conceivably overthrow Hitler. OPs choice of course.
On rearmament, my initial guess is that any changes would occur in 1937 - it would take six-nine months for the British to identify the threat and decide on a response. Significantly more escort vessels of all types would be ordered, maybe 20 instead of 10. And the same in 1938, with even more in 1939. To pay for this it's possible the last KGV would be pushed back a year and possibly ordered in 1938 as a Lion instead. (Or maybe they will order a pair of Vanguards, the UK needs to replace the 5 'R' class BBs a.s.a.p. - the turrets from the first one decommissioned after the KGV is operational could be transferred to the second Vanguard). The order for Lions then to be pushed back to 1939.) The UK still needs to modernise its battleship fleet but IF Germany had no battleships beyond "The Twins" then it doesn't really need so many as OTL.
On a broader scale, the decision to introduce conscription and prepare for war on the continent may be taken 6-12 months earlier than OTL. And the purse strings loosened accordingly.