When the Brexit process comes to a head in October the economy could shift onto a new trajectory. This Update sets out the key events that could affect which of our forecasts the economy follows.
- When the Brexit process comes to a head in October the economy could shift onto a new trajectory. This Update sets out the key events that could affect which of our forecasts the economy follows.
- The first thing to point out is that there won’t be an election before 31st October. Parliament turned down the Prime Minister’s proposal of a snap election for a second time on Monday. There has to be at least 25 working days between an election being called and polling day. With Parliament now suspended until 14th October, the earliest an election can be held is 20th November.
- Prime Minister Johnson will attempt to reach a deal with the EU while Parliament is suspended, although how earnestly he does so is open to question. The EU Council meeting of heads of state on the 17th/18th October appears to be one of his last chances to get a deal. (See Table 1.)
- The recently passed law that attempts to rule out no deal says that unless a deal is approved by Parliament or Parliament has voted for no deal by 19th October, the Prime Minister has to seek to delay Brexit until 31st January. As a result, unless a deal is reached at the EU Council meeting and ratified the day after (which would require Parliament to sit on Saturday 19th) the PM would have to ask the EU to delay Brexit again.
- There is speculation that the Prime Minister will find a way to circumvent the law. If the Prime Minister breaks the law or finds a loophole it is likely there would be an emergency court case which could force his hand. But we don’t know what the verdict would be, or if it would be delivered before 31st October.
- Either way there looks set to be an election. The opposition parties have said they will agree to one after Brexit has been delayed. Alternately, if the Prime Minister pursued a no deal Brexit on 31st October he would probably lose a vote of no confidence, perhaps on the 22nd October. The opposition could then attempt to form a temporary coalition Government in order to delay Brexit until 31st January.
- There is an outside chance this coalition goes further and holds a referendum on something similar to the existing deal and “Remain”. It is more likely, though, that this caretaker Government exists only to delay Brexit and trigger a general election in the hope that the latter breaks the Brexit impasse.
- The upshot is that the risk of a no deal at the end of October cannot be entirely dismissed. No Deal on 31st October is the default until a delay is agreed with the EU or there’s a deal. And Boris Johnson could ignore the law, the courts might not intervene, the opposition might fail to work together to form a new Government, or Johnson could refuse to recommend the would-be Prime Minister to the Queen.
- But the most likely scenario seems to be that there is another delay to Brexit, explaining the recent rise in the pound and gilt yields and in keeping with our “repeated delays” scenario. In that case we forecast that the economy will grow by 1.3% this year. Indeed, the GDP and labour market data released this week suggest the economy has remained resilient to the political crisis. Moreover, if Brexit continues to be put off, that the MPC may even raise interest rates slightly next year. (See here.)
- The economy could swing onto a different path after an election. According to the polls a Conservative majority (perhaps facilitated by a pact with the Brexit party) or a hung Parliament are the most likely outcomes. (See here.) The former would probably usher in a no deal Brexit and a recession thereafter, albeit a mild one. A hung Parliament might see Brexit continue to be delayed. If an anti-no deal coalition can be formed, or there is a surprise Labour victory, that would steer the economy towards our deal scenario. However, we think the initial boost to the economy from a resolution to Brexit would be offset in the longer term by Labour’s anti-business policies were it able to follow through with them. (See here.)
Table 1: Possible Timeline
Current default Brexit date
EU Council Meeting
Earliest possible general election
Deadline to request Article 50 extension
New default Brexit date
Possible vote for a general election/no confidence?
Source: Capital Economics
Andrew Wishart, UK Economist, +44 20 7808 4062, firstname.lastname@example.org