Schroders says the chance of a general election or a second referendum, to break the Brexit deadlock and steer the UK away from a cliff-edge Brexit it predicts will create a recession in 2019, is growing.
The asset manager says the risk of a “no-deal” or “cliff-edge” Brexit is ‘probably as high as it has ever been’. It says the need for ‘a second referendum to break the deadlock in parliament seems more apparent than ever’.
Schroders says the outlook if a second referendum is called is complicated by the many options possible for such a plebiscite. But it points to opinion polls that have offered three outcomes: “remain”, “deal” and “no deal” which have consistently found that the support for Brexit is split between the latter two, leaving “remain” as the most supported option by a big margin.
The asset manager says soft Brexit seems unlikely. While the possibility of a remain result following a second referendum and the prospect of a delay to Brexit, have helped boost the pound in recent days against the US dollar and the euro, as markets seem to be pricing in a greater probability of a “soft Brexit”. But Schroders says that investors are getting ahead of themselves as the main uncertainty now is how the Labour party will react if they fail in their bid to trigger a general election.
Schroders’ senior European economist and strategist Azad Zangana says: “In the absence of a deal being ratified, the UK will be leaving the EU without a transition period, and is likely to face significant trade tariffs in accordance with World Trade Organisation (WTO) rules, along with full customs checks, and a number of other important memberships/associations with EU institutions lapsing. Given the fragile state of the UK economy, we would then forecast a recession over 2019.
“A delay to Brexit is possible. The UK could request a temporary delay (say three months), but this would require unanimous backing from the 27 EU member states. If the UK has not made progress in securing a majority for a deal, then the EU is unlikely to support a delay without a clear mechanism to break the deadlock in the UK’s parliament. This could come in the form of a second referendum or a general election. As European Parliamentary elections are due in May, the EU is keen not to have the UK’s membership spill over into the new term, unless the UK decides to remain permanently.
“If the EU does not grant an extension to the Brexit deadline, then the UK could unilaterally revoke Article 50, only to restart the process again at a later point. This is unlikely and would certainly anger the EU and the public in the UK, especially as it would technically restart the two-year negotiation process.”
Pro-Brexit economists argue that the long-term benefits of being outside the European Union would outweigh any short-term economic pain the nation would experience.
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