Strategy & economics
Brexit deal defeat: a delayed or "soft" Brexit now more likely
A softer form of Brexit looks slightly more likely given Theresa May's historic defeat on 15 January – but a "no-deal" outcome is still possible, and would be likely to trigger a 2019 recession for the UK
Theresa May suffered an extraordinary defeat on 15 January as Parliament voted 432 to 202 against her proposed deal – one of the most significant losses in modern UK politics.
Following the Prime Minister’s “invitation”, Labour leader Jeremy Corbyn tabled a vote of no confidence in the Government.
This will be debated subject to a vote this evening (16 January).
We expect Theresa May to survive as coalition partners the DUP have voiced their support. Despite large numbers of Conservative MPs voting against the Prime Minister's deal last night, they too are expected to support the Government.
Probability of a “soft” Brexit grows
There remains a lot of uncertainty, but overall we think the probability of a soft Brexit has risen.
There appears no Parliamentary majority for a “no-deal” Brexit – although it would still require legislation to avoid it.
An extension of Article 50 is also becoming more likely as there is not enough time to get all the legislation through Parliament by the cut-off date of 29 March, but other members countries would be required to agree to it.
Prime Minister May has proposed to seek cross-party opinion and compromise on an amended deal, followed by renegotiation with the 27 member countries. Given Parliament’s opposition to a hard Brexit, a compromise deal will necessarily involve some form of pivot towards a softer Brexit deal in order to gain support from opposition parties.
Wide array of outcomes persists
Apart from the near-term risk that the Prime Minister loses the vote of confidence, there remain two other broad scenarios.
The first is of a “no-deal” Brexit. In the absence of a deal being ratified within the timeframe, or the deadline being extended, the UK could leave the EU without a transition period. If so it is likely to face significant trade tariffs in accordance with World Trade Organisation rules, along with full customs checks. A number of other important memberships and associations with EU institutions would lapse.
Given the fragile state of the UK economy, we would then forecast a recession over 2019.
The second scenario is that a cross-party compromise cannot be reached, opening the door for a further referendum and/or a General Election.
The outcome of a second referendum is unclear, in part because it would depend on the questions posed to the public. Markets fear a general election as it raises the possibility of a Corbyn government, widely seen to be detrimental to the UK economy and markets.
Sterling and markets
At the time of writing, sterling is slightly stronger than it was before the vote, perhaps discounting a slightly increased chance of a “softer” deal.
On the other hand, gilts and equities are both lower, and both underperforming European equities and bonds.
Following the defeat the FTSE 250 index – which comprises more of the UK’s domestically-focused stocks – outperformed the FTSE100, which has more global exposure. This follows an established pattern in the period since the 2016 referendum in which falls in sterling have generally translated into positive performance by FTSE 100 constituents.
Prolonged uncertainty is likely to result in the Bank of England’s Monetary Policy Committee holding off further increasing interest rates. Predictions of the next increase coming in May now look highly unlikely.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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