Snapshot - EU Referendum

Brexit deal reaction: recession averted?

What are the implications of today's breakthrough in Brexit negotiations?

17/10/2019

Keith Wade

Keith Wade

Chief Economist & Strategist

Schroders

We do not have the full details of the deal agreed between the UK and EU  as yet, but if the deal passes through parliament on Saturday we should see stronger growth in the UK economy as the cloud of Brexit uncertainty lifts.

Importantly, this is a big step toward avoiding a no-deal Brexit where the UK would have crashed out of the European Union (EU), possibly causing a damaging recession.

To get the deal through parliament the prime minister (PM) will require the support of the hard-core Brexiteers (European Research Group), the 21 Tory rebels expelled from the party and around 17 Labour MPs, on the basis that the Democratic Unionist Party (DUP) votes against it.

However, assuming the vote goes through, we will move into a transition period until at least the end of 2020. During which time the UK and EU will start to hammer out a trade deal.

There will still be some uncertainty about the UK’s future relationship with the EU; nonetheless, the likelihood of avoiding a no-deal is increasing. As this tail risk fades sterling can be expected to rally further and gilt yields rise as investors anticipate a better economy and a firmer monetary policy.

Of course, if the deal fails in parliament on Saturday we are back to where we started. Either way PM Johnson is likely to call a general election.

Azad Zangana, Senior European Economist and Strategist, looked at the economic impact of various Brexit outcomes in the Economic & Strategy Viewpoint earlier this month. 

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