Brexit defeat could be a positive for the UK and Euro economies
Theresa May likely to survive vote of no confidence
The impact on Australia of Brexit uncertainty is minimal
While Theresa May’s proposed Brexit plan suffered a large defeat in the UK parliament overnight, it may actually result in a “softer” Brexit outcome overall, which would be positive for the UK economy (and by extension the Euro area).
May will need to revise the plan for Brexit by negotiating with other parties. Because the UK parliament leans towards being more pro-Europe, a softer Brexit outcome is more likely if some agreement can be reached. This is positive for UK businesses (and the UK economy) who rely on trade across the Euro area and vice versa for Euro countries. A “hard” Brexit scenario (i.e. the UK no longer remains in the customs union), on the other hand, could knock the UK into recession and also take around 0.5% off Eurozone growth.
In the near-term, May will need to win the vote of “no confidence” in the Government which was called by the opposition after the failed deal. We expect that May will gain enough support to win this vote which should avoid a general election. It is very likely that the 29 March deadline for Brexit to occur will have to be extended, so that there is enough time to agree to legislation with the EU. However, there is still a chance that another referendum on Brexit will be put to the UK public.
There are no changes to the impact on Australia from these latest developments in the UK and the impact of Brexit uncertainty on Australia is small. Australian exports to the UK are small overall (around 1.4% of total exports in 2018) so the impact on Australian producers is marginal. We still expect that Brexit will occur, but the exact details of the EU/UK relationship are still up in the air, so Australia’s trade relationship with the UK is also uncertain. The main impact on Australia will be from volatility and loss of investor confidence in financial markets.
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