RaboResearch - Economic Research

Brexit Monitor: The only certainty is uncertainty for the start of 2019

Economic Comment


The decision by the British people to leave the EU may have serious consequences for Dutch businesses. Our Brexit Monitor keeps you up to date with the latest Brexit developments. What effects will Brexit have, and what can you expect? An overview of the main news and analysis from experts. In this issue:

  • Political developments: overwhelming uncertainty despite a deal
  • Economic developments: summer extension also comes to an end

Political developments: overwhelming uncertainty despite a deal

We have a deal!

We have a deal, but are also closer than ever to a ‘hard Brexit’. The EU and the UK reached an agreement on the divorce conditions on 14 November. That gives us a deal that can unlock a transition period if both the EU and the UK ratify the deal before 29 March 2019. According to the withdrawal agreement this transition period can be extended one time from December 2020 to December 2022 (see timeline). The EU Council approved the deal on 25 November and approval by the EU Parliament should not be problematic either.

The ball is in the English court

The EU Parliament can only vote on the deal once the British Parliament has approved it. A first attempt by the British Parliament to vote on the deal was planned for 11 December, but Prime Minister (PM) May cancelled the vote as she hoped to get more concessions from the EU during the EU Summit of 13-14 December. PM May has failed to achieve anything in Brussels, but managed to significantly reduce the already short time span we have for what is expected to be a very complex and tense turn of events in the British politics. We expect the deal to be rejected in a first voting round because various factions in the British Parliament will first attempt to get their preferred Brexit outcome. Labour for example will try to get an early general election and pro-EU MP’s will try to get a second referendum. Yet we think that the deal will be approved in a second voting round somewhere in February after all these options are exhausted, given the fact that a majority in the British Parliament wants to avoid a ‘hard Brexit’. Should any of the options above succeed, an extension of article 50 by a couple of months is in the cards. The risk of a ‘hard Brexit’, with or without extension, remains uncomfortably high.

Conservative threat neutralised

On 12 December the Conservatives triggered a vote of confidence in their leader Theresa May. The motion did not find sufficient support amongst Tory MP’s to pass and Theresa May remained in office. Moreover, as the rules allow the Conservatives only one leadership challenge every 12 months, the PM is off the hook from the Tories for now.

Economic developments: summer extension also comes to an end

The British economy performed beyond expectations in the third quarter of 2018 when the UK real GDP increased by 0.6 percent q-o-q. Private consumption and external demand were the main drivers. Investment on the other hand continued to contract just like in the first half of 2018. More recent high frequency economic indicators such as the PMI point towards a significant deterioration in the last quarter of 2018. All in all, we expect economic growth to come in at 1.3 percent in 2018 and 1.2 percent in 2019.

Pound has weakened further

The sterling lost 4 percent of its value against the euro in the past month on the back of much ado around Brexit, despite a marked initial appreciation after the EU and the UK reached a deal in November. Brexit turmoil has also led to high exchange rate volatility. We expect the coming two months to be fraught with tensions and uncertainty, and that will be the main driver of the exchange rate going forward. Assuming that a deal will be ratified on time, the sterling is likely to appreciate slightly against the euro the next six to 12 months. In the case of a ‘hard Brexit’ we see the pound sliding towards parity with the euro it currently trades at 0.89.

Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2326 6856

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