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United Kingdom Politics September 2019

United Kingdom: MPs back bill to stop no-deal; route ahead remains uncertain

On 4 September, MPs backed a bill aimed at stopping a no-deal Brexit, by forcing the prime minister to seek a three-month extension beyond 31 October if a Brexit deal has not been approved by 19 October. This came shortly before parliament was suspended until mid-October on the prime minister’s orders. Recent developments reduce the possibility of a no-deal Brexit on 31 October; however a hard withdrawal remains a possibility. Moreover, uncertainty surrounding a potential general election in the coming months and the final state of the UK’s relationship with the EU will continue to weigh on business sentiment and investment going forward.

Events could take several different turns in coming weeks. The prime minister could comply with the bill passed by parliament, seek an extension, and then—presumably—call snap elections. However, Boris Johnson has repeatedly stated his determination to leave the EU at the end of October; as such he could attempt to ignore the bill and refuse to seek an extension, although this would likely be deemed unconstitutional and could lead to a legal battle. Another option he could employ to avoid asking for an extension would be to trigger a general election, although opposition MPs have made clear they will only vote in favor of an election once a Brexit extension is secured.

It is also possible that the government achieves a revamped Brexit deal with the EU in the coming weeks, although disagreements over the Irish backstop make this tricky. That said, as Kallum Pickering, economist at Berenberg, argues: “One hypothetical change to the backstop would be easy to accept for the EU, namely to limit the customs union to Northern Ireland instead of the entire United Kingdom […] So far however, London does not seem to have sent a signal that it would want such a change”.

Looking further ahead—and assuming a no-deal Brexit on 31 October is averted—the final outcome of the Brexit process is uncertain. The result of potential snap elections in particular is highly unpredictable, given the recent seismic shifts in the political landscape; namely the rise of the Brexit Party, the resurgence of the Liberal Democrats and the realignment of voting intentions along Brexit fault lines and away from traditional leftwing/rightwing concerns. As such, business investment is likely to remain suppressed in the near term, hurting domestic activity and the economy’s productive potential.

On the FX front, the pound has gained ground since mid-August on the perceived lower likelihood of no deal. However, analysts at ING argue this tendency is unlikely to last: “We don’t expect the current GBP rebound to have legs. So far, Sterling has benefited from the mix of the success MPs have had in legislating against ‘no-deal’ Brexit and the stretched short GBP positioning. But with early elections looming, we expect the pound to soon re-start its weakening trend, given election uncertainty and the non-negligible risk of a ‘no-deal’ Brexit if the Conservative party win a parliamentary majority under prime minister Boris Johnson.”

Regarding monetary policy, the lack of clarity over the UK’s future will only further entrench the Bank of England’s wait-and-see approach, and no changes to interest rates are expected until the economy is clear of the Brexit quagmire.

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