Econosights - Brexit agreement delayed but still likely

The Brexit process was dealt another blow, with the British House of Commons voting down a revised deal put forward by Prime Minister Theresa May for Britain to leave the European Union. The proposal was defeated 391 votes to 242 votes.

The sticking point is what happens to the border between Northern Ireland and the Republic of Ireland. Few want a hard border to be re-established, but it’s difficult to see a way through for an agreement to this problem.

Future uncertain

This is the second time May’s Brexit proposal has been voted down and for now, the future of Britain’s relationship with the EU appears uncertain.

The UK parliament have subsequently rejected leaving Brexit without a deal in place. That path would hav been disastrous for the UK, potentially pushing it into recession. This would also have flow-on effects for the EU, which is already facing slow growth, with annual gross domestic product (GDP) only rising 1.4% last quarter.

Parliament voted to extend to extend the Brexit deadline. The UK will seek to extend Brexit by three months (until 30 June) if members of Parliament vote in favour of Theresa May’s Brexit deal next week (this would be the third vote on the withdrawal agreement). However, if they vote against the deal next week then the UK will need to get a longer extension from the European Commission. There is also the chance that the European Commission do not approve a Brexit delay, but this is unlikely as it is in their interest to get an orderly or “soft” Brexit. A vote to hold a new referendum on Brexit was defeated in parliament however a second referendum, a general election or the resignation of May are still possible, but these scenarios appear less likely.

Economic implications

In the near term, Brexit will influence investor sentiment, alongside other concerns such as tensions in the US/China trade relationship. It’s also likely to continue to put downward pressure on the pound.

But markets are likely to respond more positively in the long term, assuming a soft Brexit is achieved without a hard border re-established between Northern Ireland and the Republic of Ireland.

To put Brexit in its entirety in perspective, while uncertainty around the deal will have an impact on Britain and Europe in the short term, Britain makes up only about three per cent of the global economy. So its impact on markets is not expected to be material. However, the flow on effects to Europe are more significant as the EU accounts for more than 21 per cent of the world economy.