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United Kingdom Politics December 2018

United Kingdom: Prime Minister Theresa May delays parliamentary vote on Brexit deal, survives leadership challenge

In early December, Prime Minister Theresa May postponed a House of Commons vote on the withdrawal agreement, which had initially been scheduled for 11 December. The government now pledges to hold the vote by 21 January. Theresa May subsequently survived a leadership challenge triggered from within her own party, albeit by a narrower margin than expected.

The economic consequence is that political uncertainty will likely drag on growth in the coming months and put pressure on the pound. As analysts at Nomura comment: “Every day in which a Brexit deal is not agreed upon represents an extra day of uncertainty and therefore lower business investment than would otherwise have been the case. The response of a weakening in sterling is also unhelpful to consumer spending to the extent it raises import prices (though the impact on inflation is being counteracted to some extent by the recent fall in oil prices).” Economists at Unicredit state: “Sterling remains heavily exposed to headline risks […] as the [Brexit] deadline approaches, markets may well start pricing in a higher risk of a no-deal Brexit.”

Regarding monetary policy, recent political developments are likely to make the Bank of England even more cautious about tightening its stance in the short-term, despite rising wage pressures. According to Daniel Vernazza, chief UK & senior global economist at UniCredit: “We continue to expect the BoE to remain on hold until Brexit uncertainty lifts. Conditional on our expectation of a negotiated deal, we expect the BoE to hike in 2Q19 before pausing for the rest of the year.”

On the political front, the key challenge facing Theresa May hasn’t changed; there is currently insufficient parliamentary support for her Brexit deal, and attempts to extract significant concessions from the EU over the wording of the Irish backstop—a key bone of contention among pro-Brexit Conservatives and DUP MPs—are unlikely to yield any substantive concessions.

Future political developments, meanwhile, are still extremely hard to foresee. The government could eventually garner sufficient support for its current deal—particularly if it submits the withdrawal agreement to parliament only shortly before the EU departure date of 29 March, leaving little time to find an alternative solution. A no-deal Brexit, remaining in the EU and a shift towards a closer trading relationship with the EU are also possibilities.

Some FocusEconomics panelists see recent developments as conducive to a softer Brexit. Analysts at ING, for example, argue that Theresa May’s victory in the Conservative leadership contest “could give her some political clearance to seek a broader Brexit consensus across the House of Commons. In our view, that could ultimately boost the odds of either a softer Brexit (e.g. ‘Norway Plus’) or a second referendum, which seem like the options most likely to garner a majority across Parliament.”

Adrian Paul, an economist at Goldman Sachs, takes a similar view: “In our view, the net effect of the latest developments reduces the probability of a disorderly Brexit and increases the probability of a reversal of Brexit itself. The distribution of Brexit outcomes has been wide, with fat tails, for some time. We see that distribution as now being more skewed in a ‘soft Brexit’ direction.”

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