Smooth Brexit could be on cards as election looms

EU President, Donald Tusk, has announced that the EU has agreed in principle an extension to the Brexit deadline to 31 January 2020. The “flextention” will be agreed in writing in the coming days, but the announcement removes the possibility of the UK leaving the EU without a deal on Halloween.

The use of the term “flextention” is highly political and clearly designed to aid the government in its effort to finalise Brexit. In reality, the two previous extensions were also flexible in that if the UK had agreed on a way forward (deal or otherwise), then it could have left before those deadlines.

Attention now turns to the state of parliament and the need for a general election. The government has said it will try to win a vote to hold an early election under the Fixed Term Parliament Act, which requires two-thirds of members to back the motion. In its two previous attempts, the government has failed to muster the support, as the threat of a no-deal Brexit provided an incentive to keep parliament sitting. However, now that an extension has been secured, there is little incentive to prolong the impasse.

It appears that the Liberal Democrat party and Scottish National party have tabled a simple bill that proposes an election on 9 December. This would only need a simple majority, but would require the government to push it through the house this week, for parliament to be dissolved by Monday.

Once an election is confirmed, furious campaigning will follow. According to recent opinion polls, the Conservatives have a healthy lead over the Labour party, and are expected to win the election with a reasonable majority. This could of course change throughout the campaign, as previous Prime Minister Theresa May discovered in 2017.

The main threat to the government is the Brexit party. Led by Nigel Farage, it wants Brexit to happen as soon as possible, and without a deal. This version of Brexit could attract enough voters to split the support for Brexit and ultimately allow the Labour party to make gains. However, if the government wins a majority as expected, it will be able to push its latest version of the Brexit deal through the legislative procedure with little resistance.

For the economy, a smooth Brexit with a transition period removes a great deal of downside risk for the UK economy. We would expect business investment to rebound with the reduction in uncertainty, while households could also increase spending. The build-up of inventories will have to be worked through, which will be a drag on growth, but this would be complete by the end of 2020. Overall, we could see a gradual acceleration in GDP growth and confidence.