Parliament, over to you - Capital Economics
UK Economics

Parliament, over to you

UK Economics Weekly
Written by Ruth Gregory

Last week, we said that there were two big obstacles in the pathway to a Brexit deal. With the UK and the EU having come to an agreement, one hurdle has been overcome. The second, whether Parliament passes that agreement, will be clear enough after tomorrow’s fourth meaningful vote. The outcome of that vote is too close to call with any certainty. Whatever your views on the merits of the deal or Brexit in general, a deal would at least remove some of the uncertainty that has been holding back the economy.

Last week, we said that there were two big obstacles in the pathway to a Brexit deal. With the UK and the EU having come to an agreement, one hurdle has been overcome. (See here.) The second, whether Parliament passes that agreement, will be clear enough after tomorrow’s fourth meaningful vote. It’s certainly going to be tight.

With the DUP, most Labour MPs, the Liberal Democrats and the SNP unlikely to back the deal, Boris Johnson needs to get all the 28 or so Tory hard-line Brexiteers, the 20 deselected Tories plus more than 12 Labour Leavers on board. (See Chart 1.)

Chart 1: Will the Deal Pass in the House of Commons?

Source: CE; *Down from 21 to 20 after Sam Gyimah joined the Lib Dems

Admittedly, the deal could satisfy some Tory Brexiteers. By creating a customs and regulatory border in the Irish Sea, instead of the UK-wide customs partnership negotiated by Theresa May, the previous “backstop” has been scrapped, potentially allowing the UK to diverge on regulations after Brexit. In its place there is a complicated fudge in which the UK authorities apply UK tariffs to goods coming from other countries to Northern Ireland, so long as they are not set to enter the Irish Republic. If there is a risk they are destined for Ireland, then EU tariffs apply.

Meanwhile, some of the 20 deselected Tories have indicated that they might vote for the deal. And the inclusion of “level playing field” provisions in the political declaration, meaning that the UK aligns with EU rules on things like workers’ rights, could make the deal more palatable for Labour leavers.

But there is clearly a huge amount of uncertainty about all of this. And whether or not Parliament will request the deal is put to the public in a confirmatory vote (forcing a Brexit extension) could add an extra layer of uncertainty if it is tabled as an amendment to tomorrow’s meaningful vote.

As things stand, we have revised up our rough probability of a deal to 50% (from 20%), revised down the possibility of a delay to 25% (from 40%) and a no deal to 20% (from 35%). We have left the chances of Remain at 5%. But tomorrow’s vote is too close to call with any certainty, so we’d recommend placing more weight on how we think the economy would respond to any given Brexit outcome.

If a deal is passed, we expect the pound to rise from $1.28 now to about $1.35 and to $1.40 in 2021 (see here) and a reduction in uncertainty to result in a gradual rebound in business investment boosting GDP growth from 1.3% this year to around 1.5% next year and to about 2.2% in 2021. (See here.) In response, we expect interest rates to rise from 0.75% to 1.50% by the end of 2021 and 10-year gilt yields to increase from 0.75% now to about 2.00%.

Of course, a Brexit deal wouldn’t solve all the Brexit issues – it’s just a first stage with a future relationship yet to be discussed. This is the reason why we think that only half of the lost investment since the referendum will be recovered and even this will not occur instantly. (See here.) And if a deal is rejected then presumably Brexit will be delayed and an election will be required to sort out the matter. That could lead to a deal, no deal, delay or remain. So we are keeping our three scenarios for the economy based on different Brexit outcomes. Full details here.

Week ahead

We will, of course, provide clients with the implications for the economy and financial markets from the vote on the deal over the weekend.


Data Previews

Public Finances (Sep.) Tue. 22nd Oct.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

PSNB ex. Banking Groups

09.30

+£6.4bn

+£9.0bn

+£10.5bn

Student loans mean lumpier profile for borrowing

Monthly borrowing almost certainly jumped in September compared to August due to the inclusion of some student loans as lending. But it probably rose compared to September 2018 as well.

Borrowing on the PSNB ex. measure of £6.4bn in August brought cumulative borrowing in the financial year to date up to around £31bn. That’s about £6.8bn more than by August last year and it looks like that trend continued in September.

The recent change to the way the ONS treats student loans means that borrowing now jumps by about an extra £5bn in September and April and about £4bn in December and January combined, which is when students receive loan instalments. Of course, this won’t make any difference to the year-on-year growth rate, as the ONS has revised the historical data. But it will mean that borrowing now jumps in September compared to August.

What’s more, so far this year, modest growth in receipts has been outstripped by much higher departmental spending. If that trend has continued, borrowing in September would be around £1.3bn higher than a year earlier at £10.5bn.

That would leave borrowing in the year to date at £41.5bn, already 40% above the OBR’s forecast for the whole year! (See Chart 2.) If the Chancellor comes out with a more expansionary fiscal policy in the Budget, scheduled for 6th November, then he has no hope of meeting his current fiscal target.

Chart 2: Public Sector Net Borrowing (Ex. Banks, £bn)

Sources: Refinitiv, OBR, Capital Economics


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Sat 19th

UK

Meaningful Vote on Brexit Deal

UK

Possible Brexit extension request to EU from PM

Mon 21st

UK

Rightmove House Prices (Oct)

(00.01)

-0.2%(+0.2%)

UK

MPC’s Haldane speech in Frankfurt on diversity

(16.00)

Tue 22nd

UK

Parliament vote on Queen’s Speech

UK

PSNB ex. Banking Groups (Sep)

(09.30)

+£6.4bn

+£9.0bn

+£10.5bn

DR

UK

CBI Industrial Trends Survey (Oct)

(11.00)

-28

-22

Wed 23rd

No Significant Data Released

Thu 24th

EZ

ECB Interest Rate Announcement

(12.45)

-0.5%

-0.5%

-0.5%

Fri 25th

No Significant Data Released

Selected future data releases and events

Wed 30th

US

Fed Interest Rate Announcement

(18.00)

Thu 31st

UK

UK scheduled to leave the EU

(23.00)

Fri 1st

UK

IHS Markit/CIPS Manufacturing PMI (Oct)

(09.30)

DR

Also expected during this period:

28th – 3rd

UK

Nationwide House Prices (Oct)

(09.30)

DR

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts**

%q/q(%y/y) unless stated

Latest

Q1 2019

Q2 2019

Q3 2019

Q4 2019

2019

2020

2021

GDP

-0.2(+1.2)

+0.6(+2.1)

-0.2(+1.3)

+0.4(+1.0)

+0.2(+0.9)

(+1.3)

(+1.0)

(+1.5)

Household spending

+0.5(+1.8)

+0.3(+1.3)

+0.4(+1.1)

+0.3(+1.1)

+0.4(+1.3%)

(+1.2)

(+1.5)

(+1.6)

CPI inflation (%)

(+1.7) (Sep)

(+1.8)

(+2.0)

(+1.9)

(+1.6)

(+1.8)

(+1.7)

(+1.7)

ILO unemployment rate (%)

3.9 (Aug)

3.8

3.9

3.9

3.9

3.9

3.9

3.9

Bank rate, end period (%)

0.75

0.75

0.75

0.75

0.75

0.75

0.50

0.50

10 yr gilt, end period (%)

0.73

1.00

0.83

0.50

0.60

0.60

1.00

1.25

$/£, end period

1.29

1.32

1.27

1.25

1.25

1.25

1.25

1.25

Euro/£, end period

1.16

1.17

1.12

1.14

1.19

1.19

1.09

1.09

Sources: Capital Economics, Refinitiv

** Based on a scenario in which Brexit is repeatedly delayed. For more see our UK Economics UpdatePick your own Brexit forecast”, 1st July 2019.


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com