Suspending Parliament increases chances of a no deal Brexit - Capital Economics
UK Economics

Suspending Parliament increases chances of a no deal Brexit

UK Economics Weekly
Written by Gabriella Dickens

By restricting the window in which Parliament can prevent a no deal, the suspension of Parliament from sometime in the second week of September until 14th October has increased the downside risks to the economy by increasing the chances of a no deal Brexit on 31st October. With MPs set to try to make the most of one of its last opportunities to prevent a no deal next week is set to be a roller-coaster ride in UK politics.

The PM’s decision to suspend Parliament from the week commencing 9th September to 14th October has increased the downside risks to the economy by increasing the chances of a no deal Brexit on 31st October. (See here.) Indeed, in the week that many thought would be the calm before the storm in UK politics, Boris Johnson got the ball rolling early with the announcement that he would “prorogue” Parliament for up to five weeks before holding a Queen’s Speech on the 14th October. Exactly when the suspension starts hasn’t been confirmed, but it will be either on the 10th, 11th or 12th September.

By proroguing Parliament, Boris Johnson has narrowed the window of opportunity for those MPs in the House of Commons who are set to try to prevent a no deal Brexit. There are now a maximum of ten days before the 12th September (the last possible date Parliament will be prorogued) and 12 sitting days after Parliament returns between the 14th October and the 31st October Brexit deadline. This leaves little time for either of MPs’ two main schemes to prevent a no deal Brexit to be completed. (See Table 1.)

The first and preferred way is legislation. MPs may now only have ten days to legislate before Parliament is suspended, perhaps to force the government to request an Article 50 extension or to legislate that the UK cannot leave the EU before it has a deal. Second, MPs could use a no confidence vote to bring down the government and attempt to from a new caretaker government.

Both routes take time. Passing legislation in such a short timeframe is a tall order. And the government could use delay tactics or just refuse to recommend that the Bill is rubber stamped by the Queen. And so far, MPs have failed to agree on a leader for a national unity government, with many seemingly unwilling to put Jeremy Corbyn in No. 10, even temporarily as a caretaker PM.

Over the next two weeks we will get a better idea if there are the numbers and will in Parliament to block a no deal. The game is not up if nothing is secured in the next few weeks. After all, there will be another, longer, two and a half week period once Parliament returns on the 14th October for efforts to resume. Nonetheless, by restricting the window in which Parliament can prevent a no deal, the suspension of Parliament has probably increased the chances of a no deal on 31st October.

Table 1: Key No Deal Brexit Dates

Source: Capital Economics

Finally, the rising chances of a no deal seem to have come at the expense of further Brexit delays rather than a deal, particularly given the positive sounds coming from last weekend’s G7 summit.

Meanwhile, with the chances of a no deal rising, it was no surprise that business and consumer confidence fell in August. (See here.) But we still think that GDP growth will rebound in Q3. (See here.) As such, a recession still seems unlikely before Brexit. What happens in Q4 is entirely down to whether there is a deal, no deal or further delay.

Week ahead

With MPs set to try to make the most of one of its last opportunities to prevent a no deal, next week is set to be a roller-coaster ride in UK politics. Meanwhile, in next Wednesday’s Spending Review, we will find out whether overall spending will be raised above that previously outlined by Mr Hammond in the 2019 Spring Statement. An increase in spending relative to existing plans does seem likely, but the Chancellor probably won’t loosen the purse strings too much not least because he may want to leave himself some room to deliver on his previous pledges to reduce taxes.


Data Previews

IHS Markit/CIPS Manufacturing PMI (Aug.) Mon. 2nd Sep.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Manufacturing PMI

09.30

48.0

48.3

48.5

Weak global industry holds back the UK

We suspect the manufacturing PMI held broadly steady in August at a low level, suggesting that manufacturing output has continued to contract.

Having fallen sharply in June, the IHS Markit/CIPS manufacturing PMI was unchanged at 48.0 in July indicating that the sector continued to suffer from a Brexit-related hangover and weak global industry.

The PMI won’t have recovered much in August. While the US and euro-zone flash manufacturing PMI’s stabilised, they remained consistent with continued weakness in global industry, which will prevent any meaningful recovery in the UK.

That said, firms starting to gear up for a no deal Brexit on 31st October might give the PMI a small boost. Stockpiling three months prior to the original March 29th Brexit deadline resulted in the stocks of purchases balance rising from 54.9 to 57.3 in January, pushing up the headline manufacturing PMI. Overall, we have pencilled in a small rise in the PMI from 48.0 in July to 48.5 in August. (See Chart 1 below). That would leave the PMI consistent with manufacturing output continuing to contract in Q3, albeit not as sharply as in Q2.

Chart 1: IHS Markit/CIPS Manufacturing PMI & Manufacturing Output

Sources: IHS Markit, Refinitiv, Capital Economics

IHS Markit/CIPS Services PMI (Aug.) Wed. 4th Sep.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Business Activity Index

09.30

51.4

51.2

52.0

All-Sector PMI

09.30

50.3

51.3

All-sector PMI points to rebound in growth in Q3

We think that both the services PMI and all-sector PMI picked up slightly in August, indicating that GDP growth rebounded in Q3 after slipping into negative territory in Q2. However, the PMI would still only point to subdued growth.

July’s IHS Markit/CIPS services PMI rose from 50.2 in June to 51.4 in July. The sub-indices were more mixed but the new orders index, which tends to have a good relationship with the headline balance in the near term, picked up from 49.9 in June to 53.0.

Admittedly, the future activity index fell from 64.9 to 63.3. But the CBI and Bank of England’s Agents services surveys point to a tick up in the services PMI in August. We have pencilled in a small rise in the PMI from 51.4 in July to 52.0 in August.

Combined with our construction and manufacturing forecasts, we expect the all-sector PMI to rise from 50.3 in July to 51.3 in August. This points to growth of about 0.1% in the three months to August – better than the 0.2% q/q contraction in Q2 but nothing to shout about. (See Chart 2 below).

Chart 2: All-Sector PMI & GDP

Sources: IHS Markit/CIPS, Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Mon 2nd

UK

IHS Markit/CIPS Manufacturing PMI (Aug)

(09.30)

48.0

48.3

48.5

DR

Tue 3rd

UK

Parliament Returns from Summer Break

UK

BRC Retail Sales Monitor (Aug)

(00.01)

(+0.1%)

(0.5%)

UK

IHS Markit/CIPS Construction PMI (Aug)

(09.30)

45.3

45.5

47.0

Wed 4th

UK

Earliest date a vote of no confidence can be held

UK

IHS Markit/CIPS Services PMI (Aug)

(09.30)

51.4

51.2

52.0

DR

UK

IHS Markit/CIPS Composite PMI (Aug)

(09.30)

50.7

50.5

51.0

DR

UK

IHS Markit/ CIPS All-Sector PMI (Aug)

(09.30)

50.3

51.3

DR

UK

Government Spending Review

(12.00)

Thu 5th

UK

New Car Registrations (Aug)

(09.00)

-4.1%

Fri 6th

UK

Halifax House Prices (Aug, m/m(3m/y)

(08.30)

-0.2%(+4.1%)

+0.0%(+3.4%)

Selected future data releases and events

Mon 9th

UK

Monthly GDP (Jul, m/m(3m/3m))

(09.30)

DR

UK

Industrial Production (Jul)

(09.30)

DR

UK

Construction Output (Jul)

(09.30)

DR

UK

Trade Balance (Jul)

(09.30)

DR

Tue 10th

UK

Latest date for vote of no confidence if an election is to be held before Brexit

UK

Labour Market (Jul)

(09.30)

DR

10th-12th

UK

Parliament Suspended

*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

+0.5(+1.8)

+0.5(+1.8)

-0.2(+1.2)

+0.4(+1.0)

+0.2(+1.1)

(+1.3)

(+1.5)

(+2.0)

Household spending

+0.6(+1.9)

+0.6(+1.9)

+0.5(+1.8)

+0.5(+1.9)

+0.5(+1.8)

(+1.9)

(+2.0)

(+1.8)

CPI inflation (%)

(+2.1) (Jul)

(+1.9)

(+2.0)

(+2.0)

(+1.9)

(+1.9)

(+2.3)

(+2.3)

ILO unemployment rate (%)

3.9 (Jun)

3.9

3.8

3.9

4.0

3.9

4.0

4.0

Bank rate, end period (%)

0.75

0.75

0.75

0.75

0.75

0.75

1.00

1.25

10 yr gilt, end period (%)

0.49

1.00

0.83

0.60

1.00

1.00

1.25

1.75

$/£, end period

1.22

1.32

1.27

1.25

1.25

1.25

1.30

1.35

Euro/£, end period

1.10

1.17

1.12

1.12

1.19

1.19

1.13

1.17

Sources: Capital Economics, Refinitiv

** Based on a scenario in which Brexit is repeatedly delayed. For forecasts based on a deal or a no deal, please see our UK Economics UpdatePick your own Brexit forecast”, 1st July 2019.


Gabriella Dickens, Assistant Economist, +44 20 3974 7421, gabriella.dickens@capitaleconomics.com