United Kingdom: Parliament rejects Brexit withdrawal agreement; road ahead unclear
On 15 January, Theresa May’s Brexit withdrawal agreement was resoundingly rejected by parliament, with her government subsequently surviving a no-confidence motion presented by the opposition Labour Party. On 21 January, Theresa May announced her intention to secure concessions from the EU over the Irish backstop in order to win the support of pro-Brexit Conservatives and the DUP. Her revised proposals will be debated and voted upon on 29 January. Moreover, several MPs have announced amendments to her plans, some of which should also be voted upon on 29 January and which could see parliament wrestle control of the Brexit process from the government. As a result, all possible outcomes—no deal, no Brexit and leaving the EU with a deal—remain firmly on the table. The upshot is heightened economic uncertainty, which will likely weigh on consumer spending, business investment and employment in Q1.
Theresa May’s deal is unlikely to make it through parliament in its current form, given the huge level of opposition it currently faces, and the fact that the EU is unlikely to provide the guarantees over the backstop that the government is currently seeking. According to analysts at ING: “Realistically this means that the only way May’s deal will get through would be if lawmakers eventually baulk at the prospect of ‘no deal’.”
A softer version of the current deal involving changes to the political declaration on the future relationship—such as a promise to pursue a customs union with the EU and remain in close regulatory alignment with the bloc—could command a majority in parliament. However, Theresa May would run the risk of splitting her party in the process, something she has thus far looked to avoid at all costs.
No Brexit is also possible, although this would almost certainly require a referendum first, and calling a referendum would again likely provoke the ire of many Conservative MPs. Lastly, in the absence of any change, a no-deal Brexit is the current default outcome embedded into UK law, even though there is a large majority in parliament against this happening.
As a result of the continued lack of clarity over Brexit, an extension to Article 50 beyond the end of March is increasingly likely, especially considering many MPs are actively working to ensure this occurs. For instance, one particular amendment which could be voted upon on 29 January would give MPs the right to request an extension if a no-deal Brexit appeared imminent.
Regarding the economic impact of the parliamentary impasse, economists at Nomura comment: “ongoing uncertainty as we move closer to 29 March could have a pernicious effect on business investment and other areas of economic activity which–notwithstanding the possibility of increased production for stockpiling–could begin to have a more meaningful impact as the current quarter progresses.”
Looking at monetary policy, the Bank of England is likely to await the outcome of the Brexit process before altering its stance. As such, any delay to the Brexit departure date would likely cause the BoE to push back any rate change. As Adrian Paul, economist at Goldman Sachs, states: “Article 50 extension also prolongs the uncertainty weighing on the UK economy and skews the risks to the May interest rate hike in our baseline Bank of England forecast to later in the year.”
Turning to currency markets, the future evolution of the pound hinges on a deal being agreed. In the event of no-deal, sterling could lose significant value, while the opposite would likely be true in the event of a deal or no Brexit. Kallum Pickering, senior economist at Berenberg, comments: “We see up to 10% upside for trade-weighted sterling in 2019 if the UK dodges the hard Brexit bullet”. Economists at Unicredit take a similar view: “We would expect sterling to rally across the board once it becomes clear that a deal will be found, with EUR-GBP likely to break below 0.85. […]. However, should the risk of a no-deal Brexit materialize, this would likely cause another period of sharp sterling depreciation, with EUR-GBP likely to rise to 0.95, potentially even higher.”