UK equities
15 Jan 2019 | By Richard Buxton

Brexit meaningful vote: division bells ring out loud

Richard Buxton comments on the result of the meaningful vote on Theresa May’s Brexit deal, arguing that the chance of a no-deal Brexit has fallen as a result of the Government’s defeat

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Headline comments:

  • Brexit “meaningful vote” leads to largest defeat of a Government since the 1920s
  • Political tensions and a request for urgent clarification on the UK’s position from the European Commission notwithstanding, likelihood of a no-deal Brexit has receded
  • If a deal can be reached, against backdrop of May’s commitment to seek consensus, the “brake” on UK economy can be released

Had the Speaker, John Bercow, selected for debate the amendment to the negotiated Brexit agreement tabled by Tory MP Andrew Murrison – which would have sought to ensure that the agreement could only be passed with a guaranteed expiration of the so-called “Irish backstop” arrangement in 2022 – the agreement itself might have had a feline’s chance in Hades of garnering sufficient, or at least more, support in Britain’s deeply divided House of Commons.

But as news emerged that Murrison’s amendment was not one of the four to be selected for debate, it became clear that the Government was facing a substantial defeat. Even those expecting the Government to lose might not have forecast the biggest defeat since the 1920s.

With the no confidence vote in the Government – which it is widely expected to win – now tabled for tomorrow, and against the backdrop of a commitment by the Prime Minister to work constructively across Parliament to seek some form of consensus she can then take to the EU, there is, in my view, an increasing likelihood that a ruinous no-deal Brexit is likely to be averted. It must be acknowledged that not everyone shares this view; patience in the EU is rapidly wearing thin, as the EU’s official statement, released minutes after the result of the vote, painfully shows.

The economy and markets…

In recent days, sterling has strengthened against the US dollar and the euro, as investors increasingly perceived that the risk of the UK leaving the EU without a deal was receding as Parliament asserted its authority.

The UK equity market has similarly strengthened recently, with the strongest bounces seen in more domestically focused companies such as retailers.

Notwithstanding increasing optimism that a no-deal scenario can now be avoided – there is clearly no mandate for that outcome, either – continuing uncertainty over Brexit will remain a significant “handbrake” on the UK economy and UK stock market. Only when certainty over the UK’s future relationship with the EU emerges is business confidence and investment, and indeed consumer confidence, likely to return. Until such a time, the “handbrake” will, I believe, remain obstinately jammed. Any extension of the Article 50 process would, in my view, simply perpetuate the present impasse.

In the event of some form of the Government’s deal ultimately garnering sufficient support to pass through the House of Commons, I believe sterling would once again strengthen, although I do not see it regaining pre-referendum levels versus the US dollar or the euro; a strengthening in the region of 5-8% would seem more likely than the approximately 15% rally by the pound that would be required to regain those pre-referendum highs.

The uncertainty that has hung over the economy since the referendum has resulted in quarterly GDP growth in the region of 0.2-0.3%. I believe that the ultimate safe passage of a satisfactory deal through the Commons could quickly lead quarterly UK GDP growth to return to the 0.5-0.6% range.

If a deal can ultimately be agreed, I believe we may see the Bank of England hike policy interest rates up to three times over the course of 2019. Conversely, if the UK does leave the EU without an agreement, I would expect the Bank’s Monetary Policy Committee to move rapidly to cut interest rates from their already-low levels. The resumption of monetary stimulus, in the form of quantitative easing would, in my view, be a possibility.

The politics…

With the uncertainty over this crucial vote itself now over, the one remaining certainty is that both in Parliament and the UK at large, division will reign supreme. In this climate, any number of events could now transpire, as sentiment fluctuates by the minute.

Having survived the confidence vote on her leadership in December, and notwithstanding the Government’s defeat tonight, I believe the Prime Minister is likely to remain in post, at least for the foreseeable future – I cannot see the Cabinet forcing her to resign, and it is equally difficult to imagine she will decide to go of her own accord. That being said, this clearly cannot be guaranteed.

One thing has been consistent throughout this process, namely the Prime Minister’s intransigent tone and her conviction that this is the only deal available. Tonight’s result may see that change.

Labour’s commitment to call a vote of no confidence in the Government, and the EU’s repeated statements that the negotiations over the deal cannot be re-opened notwithstanding, it seems highly probable that Mrs May will now return once again to Brussels and attempt to gain further assurances from the EU. In this eventuality, she will have to rely on the reticence of the EU itself to allow the UK to leave with no deal.

In any event, it seems probable that the Government will win the no confidence vote. Thus, if she is unable quickly to secure the necessary concessions from the EU, and to win the expected vote of no confidence, there is every probability that the Article 50 “clock” will – in due course – need to be paused, initially with a view to securing a further period of negotiation time. Given parliamentary rules requiring 21 days for Parliament to approve legislation, the latest a temporary extension of Article 50 could occur would be 26th February.

For the time being, however, continuing uncertainty over the shape of the final outcome of the Brexit process seems the only certainty. In this debate, few would be so bold as to declare definitively what will happen next. Ongoing political tensions in both the UK and between the UK and the EU aside, this observer continues to believe that the strength of feeling in the Commons against a no-deal exit means that this outcome has a strong chance of being avoided.

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