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Brexit update: May-be later

Economic Report

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  • Prime Minister (PM) May avoided another outright confrontation between the pro-EU and pro-Brexit camps within her cabinet and party as the House of Commons voted down an amendment that would have given parliament more influence over Brexit negations if the government failed to reach a deal
  • This is the second crisis PM May managed to avoid this month, as recent Brexit debate has brought to the surface the high degree of polarization on Brexit in the British politics and cabinet
  • A confrontation between the two camps risks antagonizing the pro-Brexit Conservatives and triggering a Tory leadership challenge
  • PM May has managed to postpone such a confrontation by fudging solutions to various Brexit issues at the cost of remaining vague in its official standpoint towards the EU
  • As a result little progress has been booked on negotiations with the EU since March and that risks delaying the deadline for a signed withdrawal agreement towards the end of 2018
  • This reduces the time available for ratification and maintains high Brexit uncertainty for longer, which is likely to speed up preparations for a ‘hard Brexit’ as the possibility that this scenario unfolds persists
  • Nevertheless, we maintain our base case of a last minute deal that leads to a transition period up to December 2020 and a comprehensive Free Trade Agreement afterwards

No confrontation yet

On 20 June the British House of Commons voted against an amendment that would have given UK parliament more control over Brexit negotiations if PM May failed to have a good deal by January 2019, also known as the ‘meaningful vote’ amendment. Its approval would have reduced the chances of a no-deal ‘hard Brexit’ significantly. That in turn could have led to a vehement reaction from the pro/Brexit Conservatives within the cabinet that could have triggered a cabinet crisis or leadership challenge. The government argued that the ‘meaningful vote’ would tie its hands in Brexit negotiations with the EU and has reportedly made concessions that could give parliament some influence in case of a ‘no deal’, though it is unclear whether parliament will actually be able to enforce this. The amendment was rejected on a vote count of 319 against and 303 in favour.

More Brexit fudge driven by political polarization

This is not the first crisis PM May managed to avert this month. Earlier this month PM May only just managed to prevent the resignation of her Brexit Secretary David Davis on the back of her proposal for a backstop to a hard Irish border. Recent Brexit debate in the UK has highlighted the high degree of polarization around the desired Brexit outcome in British politics; polarization that can be observed at all political levels: parliament (both amongst ruling Conservatives and the Labour opposition), the cabinet and even PM May’s own Brexit committee. Tensions have flared up occasionally and a confrontation between the two camps within PM May’s cabinet risks triggering a leadership change, which in turn can lead to a disorderly Brexit. The PM has so far managed to avoid such a confrontation by fudging solutions to the various Brexit issues. That in turn leaves the official standpoint of the UK government on various Brexit topics inconclusive and risks stalling negotiations with the UK.

Stuck in the Irish border

Actually, the vagueness on the UK government side has led to little progress on negotiations of the withdrawal agreement between the EU and the UK since March 2018 and that risks causing further delays. Following earlier progress on the withdrawal terms in December 2017 and on a transition period in March 2018, Brexit negotiations between the EU and the UK have now stalled. Recent Brexit debate in the UK has been focused on finding a solution that prevents a hard border between Northern Ireland and the Republic of Ireland post-Brexit. The EU has been negative on the two proposals the UK has made (known as ‘maximum facilitation’ and ‘customs arrangement’). Both require further technological development to become feasible and are further being investigated by the UK Brexit Committee. Meanwhile, the UK has suggested the country could stay in the/a Customs Union with the EU for longer as a backstop to a hard Irish border. Some legislative alignment on goods is also being considered, as the customs union does not entirely solve the issue of border checks. Given the lack of progress and the intense debate revolving this issue in the UK, the EU’s goal of having a solution to the contentious Irish border problem before the 28-29 June EU summit will be missed. Moreover, it now seems likely that the signed withdrawal agreement will not be ready at the EU summit in October. The deadline might instead be shifted to a one-off summit in November or the EU summit at the end of December. Such a delay would leave only three months for ratification of an EU-UK agreement. More importantly, it maintains the high degree of uncertainty around Brexit for longer, likely triggering a large number of companies to fall back on their contingency plans. In fact, EU leaders are reportedly preparing to issue a call to the EU27 to step up preparations for a ‘no-deal’ scenario at the EU summit next week. 

Figure 1: Nine months left until Brexit day
Figure 1: Nine months left until Brexit daySource: Rabobank

Moving towards a softer Brexit?

The recent debate triggered by the Irish border issue has brought to the surface that there is wide support for a softer Brexit (participation in the customs union and maybe even parts of the single market) in parliament, both in the House of Lords and House of the Commons. However, this support has so far failed to materialize into concrete actions that could push negotiations into that direction. An important milestone in that sense is the customs union amendment to the trade bill that would oblige the government to strive for a/the customs union with the EU. The House of Commons vote on this is planned for July. However, this timing is not certain given PM May’s inclination towards postponing confrontations.

Unchanged expectations

Despite all the political noise in the UK and the delays in Brexit negotiations with the EU we maintain our base case of a last minute deal that leads to a transition period up to December 2020 and a comprehensive Free Trade Agreement afterwards. The revealed support for a customs union increases the odds that such an agreement will include some kind of a Customs Arrangement. Based on this scenario, we expect the economy to slow down from 1.7% growth last year to 1.2% in 2018, as already weak consumption further softens and Brexit uncertainty takes its toll on investments. We then expect the economy to slow down towards a trough in 2020 and gradually pick up thereafter. The GBP is also expected to remain weak and monetary policy to tighten this year, though the Bank of England did not take a step in that direction today. The risks to the economy are tilted to the downside though, as the possibility that a ‘hard Brexit’ materializes next year persists.

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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2326 6856

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