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No-Deal Brexit: Boris Johnson’s Premiership Makes It More Likely

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On 25 July Boris Johnson won the Conservative party race to become the new Prime Minister, followed by Theresa May’s resignation. The new PM has installed a Hard Brexit-orientated cabinet and has promised to leave the EU by the current 31 October 2019 deadline at all costs.

The EU has already rejected PM Johnson’s proposals to renegotiate the preliminary November 2018 EU-UK Brexit agreement. It has reiterated it will not abandon the Irish backstop (ensuring a free border between Northern Ireland and the Republic of Ireland), which Johnson wants to abandon as a precondition for a new EU-UK deal.

With little chance of negotiating a new deal on the Conservative Hard Brexiteers’ terms by October, the UK would appear to be headed towards a costly No-Deal Brexit. However, the majority of Members of Parliament are opposed to a No-Deal Brexit. The Conservative government is vulnerable to a no-confidence vote, which would block Conservative plans to exit by 31 October.

This article reviews Euromonitor International’s Brexit scenarios, given these new developments. While achieving a customs union (CU) remains the highest probability scenario, that still leaves a 30-50% probability of the UK crashing out of the EU without a deal.

Brexit Scenarios

Source: Euromonitor International Macro Model and Brexit Scenarios Tool

Baseline Scenario: The EU and UK agree on a Customs Union

Estimated Probability:  26-36%

The Conservative party-DUP government is extremely vulnerable, with popular support for the Conservatives having plummeted to around 20-25%. The overall majority in Parliament is in favour of a customs union or a light Brexit, and it is strongly opposed to a No-Deal Brexit. Labour leader Jeremy Corbyn is quite likely to trigger and win a no-confidence motion in September-October 2019, leading to a general election.

An attempt to push through a No-Deal Brexit against the wishes of the Parliamentary majority is also likely to trigger a revolt by Conservative pro-Remain/Light Brexit MPs. Conservative Hard Brexit supporters have threatened to prorogue parliament in the autumn to ensure the UK exits in November 2019 even without a deal. However, prorogation requires approval from the Queen, who is likely to refuse such a request.

As of late July, parties that favour a CU or a Light/No Brexit seem to have the edge in the popular vote, and they would likely win a majority of seats in a new election. Furthermore, the EU is likely to grant an extension of the article 50 period if elections were held. This maintains the CU as the most likely compromise scenario between a No-Deal Brexit and a Light Brexit, although its probability has declined to just over 30% since Boris Johnson became the PM at the end of July.

The CU maintains tariff-free trade in goods between the EU and UK, except for several agricultural and fisheries products. Relative to the European Single Market, the CU leads to significant non-tariff barriers, especially for services. The loss of Single Market membership significantly raises administrative costs for firms exporting to the EU. The UK loses its financial services EU passport. As a result, financial institutions shift key parts of their operations from London to the EU.

There would be a transition period of around one year. During the transition period, the UK would continue to make payments to the EU and follow all EU rules without any EU voting rights. In exchange, the UK would still benefit from the European Single Market in 2019-2020, and UK-EU trade would continue essentially as before Brexit during the transition.

No-Deal Risks Have Increased

Most Likely/Moderate No Deal Brexit, Estimated Probability: 20-30%

Disorderly No-Deal Brexit, Estimated Probability: 10-20%

The new Conservative PM Boris Johnson has appointed a pro-Hard Brexit cabinet and has announced that the UK will leave the EU with or without a deal after 31 October 2019. The EU has already rejected Boris Johnson’s Brexit deal renegotiation proposals, as violating the EU’s negotiation red lines. Therefore, the current Conservative government’s position appears to lead to leaving the EU without a deal after October 2019.

While the majority of the UK Parliament’s MPs and the British public are against exiting without a deal, this remains the legal default if no new deal is agreed by 31 October and if the EU does not grant another article 50 extension.

An article 50 extension is unlikely unless the Hard Brexiteers controlling the governing Conservative party agree to the conditions of the November 2018 EU-UK agreement (which they have strongly rejected) or the current government collapses, leading to an election.

Hard Brexiteers have also threatened to prorogue Parliament to avoid any further debate or attempts to block a No-Deal Brexit in September or October. These factors have significantly increased the risks of No-Deal Brexit scenarios.

In the No-Deal scenarios, the UK leaves the EU at the end of 2019 without reaching a new trade agreement. Trade relations with the EU default to WTO conditions with significantly higher barriers.

In our main No-Deal scenario, severe trade disruptions last for 1-2 quarters, until UK and EU customs services develop the capacity to handle the massive increase in work volume and complexity. Supply chain disruptions lead to slowdowns in factory production lines.

Pessimism about future profits reduces business investment and labour demand. Consumer spending also declines due to lower wages, higher inflation, higher unemployment and reduced future income prospects. Declines in trade and foreign investment reduce long-term labour productivity. The level of UK GDP declines by 2-5% below the baseline forecast over five years.

In a more severe Disorderly No-Deal scenario, border disruptions last for 2-4 quarters, trade responsiveness to higher tariffs and non-tariff barriers is stronger than expected and the British economy is hit by significant financial shocks after exiting the EU without a deal. In this case, the UK economy would enter a severe recession, with GDP contracting by 5-7% relative to the baseline scenario one year after the UK crashes out of the EU. UK real GDP would contract by 5-9% relative to the baseline forecast over five years.

Light/No Brexit Scenarios Remain Possible

Estimated Probability: 24-34%

Pro-EU factions may still prevail in the British Parliament after a no-confidence vote and new elections, leading to the UK targeting a final deal close to Norway’s European Economic Area conditions together with a Customs Union (Norway Plus). Alternatively, the UK could hold a second referendum between implementing a trade deal based on the November 2018 UK-EU agreement and staying in the EU. Recent polls suggest remaining in the EU would win a second referendum, although the vote would remain close.

In this scenario, the UK retains access to the European Single Market, Customs Union and financial sector passporting rights. UK citizens also retain full EU movement and immigration rights. In exchange, the UK allows free movement of EU citizens. Business investment recovers from the slow growth in 2016-2018 and consumer spending rebounds. Real GDP growth recovers to around 2% annually in 2019-2021. The level of GDP increases by 1-3% relative to the baseline forecast over a five-year horizon.

No-confidence vote and elections or a No-Deal Brexit

The UK now appears to be heading towards a choice between a no-confidence vote in the government followed by new elections, and a No-Deal/Disorderly Brexit. While we still estimate the odds to be moderately tilted towards a collapse in the government followed by a new EU-UK deal or even a Light Brexit, we may be approaching a point where a No-Deal Brexit becomes the baseline outlook.

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