Outlook & commentary

Brexit - going through the motions

London skyline

Summary

On 15 January, UK prime minister Theresa May suffered a resounding parliamentary defeat on her EU withdrawal bill. An unsettled couple of weeks now lie ahead.

On 15 January, UK prime minister Theresa May suffered a resounding parliamentary defeat on her EU withdrawal bill, with 432 MPs voting against the bill (including 118 of her own MPs) versus 202 in favour. The bill set out the terms of the UK’s exit from the EU on 29 March, beginning a 21-month transition period during which a trade deal could be agreed.

An unsettled couple of weeks now lie ahead. In response to the vote, the leader of the opposition, Jeremy Corbyn, tabled a vote of no confidence, potentially triggering a general election. We think it unlikely that this motion will succeed.

Per the amendment tabled by Conservative MP Dominic Grieve, Mrs May has until 21 January to return to parliament with a “Plan B”.

The sheer scale of Mrs May’s defeat underlines once more the deep divide among MPs and suggests that achieving a majority for a deal in a potential second vote will remain very challenging – unless we see material concessions by the EU or changes in the government’s position.

Realistically, there’s limited scope for substantive concessions from the EU, aside from cosmetic tweaks to the non-legally binding declaration on the future partnership. For example, the EU could come up with further non-binding “clarifications” on how to work on customs processing systems for Ireland within a given time frame.

Meanwhile, the Brexit clock is ticking fast, with little more than 70 days until the UK is due to leave the EU. It is hard to see what can be achieved within the current Brexit timetable. As such, the prospect of an extension of the 29 March deadline has risen.

The Commons defeat suffered by Mrs. May could give her an opportunity to change tack, and she has pledged cross-party talks ahead of a second parliamentary vote. Similarly, the likely defeat of Mr Corbyn’s no confidence motion may cause him to move to a new position. Whether he would push for a second referendum thereafter remains a point of speculation.

Against this backdrop, we think an extension to the March 29 deadline is the more likely of potential outcomes. The main question is the basis on which the EU agrees to this extension.

While a “no-deal Brexit” remains a potential outcome, the operational hurdles for a “crashing out” on 29 March have risen following (i) the European Court of Justice ruling that the UK can unilaterally revoke Article 50 and (ii) a parliamentary vote giving MPs more control over negotiations.

Looking ahead:

  • Uncertainty persists. Even if a “cliff-edge” scenario is avoided, uncertainty will persist given that any agreed withdrawal deal will merely set the scene for the future trade relationship. Therefore, investors and companies need to prepare for a wide range of scenarios.

  • The impact of Brexit will be uneven. Whatever the ultimate Brexit “end state”, more frictions in trade with Europe seem unavoidable. This will affect EU member states, the UK and its various sectors differently. For the UK, time and active trade policies are necessary to mitigate some losses from higher restrictions to EU trade, but this may not offset them completely.

  • Brexit entails a bumpy ride for UK assets. But the UK stock market is not the UK economy. Seventy percent of FTSE 100 revenues are generated overseas. The dichotomy between internationally and domestically oriented UK stocks might well continue.

 

 

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Europe’s economic slowdown makes the proposed normalisation of ECB monetary policy harder

european central bank

Summary

The European Central Bank’s gradual normalisation of its monetary policy should continue, but the economic slowdown in the euro-zone will likely delay any rate increases, and the window of opportunity is becoming increasingly narrow.

Key takeaways

  • At its meeting on 24 January, the ECB should consider the economic slowdown seen in the euro-zone’s four largest economies during the fourth quarter of 2018
  • To avoid a sharp slowdown in financial conditions, the ECB should discuss the possibility of new liquidity programmes targeted to meet the needs of banks
  • In the context of economic slowdown and a possible pause in rate hikes by the Fed, the normalisation of the ECB's monetary policy is becoming more complex
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