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The UK parliament yesterday (15 January) rejected decisively by
432 votes to 202 the government's recently concluded deal with the
European Union, which was designed to allow for an orderly UK exit
from the EU on 29 March. The likelihood of the current arrangement
being implemented on time, or indeed altogether, has now been
greatly reduced. In terms of our UK growth projections, the impact
of yesterday's vote is likely to be limited because of conflicting
pulls, but it does provide support to our cautious assessment when
compared with the consensus.
Key points
As expected, the lack of political consensus on what Brexit
means for the UK led to the country's parliament rejecting the
draft Withdrawal Agreement and Political Declaration, implying that
continued uncertainty is likely to weigh down on economic sentiment
and activity.
Given UK parliament's rejection of the deal, the probability of
the current arrangement being implemented on time, or indeed
altogether, is reduced.
The UK corporate sector had broadly backed the Withdrawal
Agreement as the first step towards a more business-friendly
settlement but feared that political divisions around the exit
agreement threatened to scupper the plan. After yesterday events,
firms remain highly uncertain about the Brexit political process,
and are increasingly frustrated that a "no deal" scenario remains
an option, implying continued contingency planning.
With regards to our near-term growth projections, the impact of
yesterday's lost vote is likely to be limited because of
conflicting pulls, but it does provide support to our more cautious
assessment when compared with the consensus.
Our scenario continues to predict that the economic
consequences of a no-deal Brexit would be significant. The UK
economy lacks sufficient strength to absorb the full impact of a
chaotic Brexit.
The no-deal scenario assumes that the UK would be in recession
from mid-2019 to early 2021, and that its economy would contract by
0.9% in 2019, 2.4% in 2020, and 0.5% in 2021. By 2026, real GDP
would be 9% lower in the no-deal scenario when compared with the
September 2018 baseline, which assumes an orderly exit and
transition period for the UK.
Outlook
The government's defeat implies a broad array of possible
pathways on future Brexit proceedings. Most MPs are strongly
opposed to a "no deal" Brexit in which the UK would leave the EU
without any formal arrangements in place.
In the absence of an exit deal, all alternative next steps -
excluding a "no deal" Brexit or revoking Article 50 procedures and
hence stopping Brexit - would most likely require a delay to
Brexit. In accordance with the EU's Lisbon Treaty, such a delay
would have to be unanimously supported by all remaining 27 EU
member states. Although there is a degree of preparedness to
continue accommodating the UK's domestic political turmoil, the EU
is unlikely to agree to any extension of the Brexit deadline beyond
2 July 2019, at which point the EU enters a new term.
With regards to economic signposts, we acknowledge the
uncertainty enveloping economic activity witnessed in late 2018 is
likely to spill into 2019. The lingering risk of a "no-deal" Brexit
could encourage consumers and firms to bring forward purchases to
protect themselves from the possibility of a <span/>no-deal exit
on 29 March 2019. Firms are elevating their stock levels in
anticipation of acute shortages should the UK depart the EU with no
deal. UK firms remain nervous about the Brexit end-game,
highlighted by poor business sentiment. This is an acute downside
risk to future investment and employment intentions, which
underpins our cautious short-term growth assessment.
An array of complex challenges, such as border management and
trade relations, remain. Fundamental questions about the nature of
the future UK-EU relationship remain unanswered. Therefore, we
anticipate a challenging UK growth landscape in 2019-20, with the
balance of risks tilting to the downside. Clearly, the lack of
clarity about how the Brexit political process will evolve suggests
further downward pressure on our near-term growth projections.
Posted 16 January 2019 by Raj Badiani, Senior Principal Economist
