Sliding down the banister towards a no-deal Brexit

August 02, 2019

With Boris Johnson now at the helm, the UK seems to be sliding down the banister towards a no deal Brexit. The new Prime Minister began his term by pledging to go ahead with Brexit before the October 31st deadline, with ‘no ifs or buts’. Subsequently, Michael Gove, the minister responsible for no-deal planning, saying that leaving without an agreement was now the government’s working assumption.

                Several minister’s within Johnson’s newly re-shuffled cabinet have said that they do still prefer to leave with a deal, but only if it is re-worked to include more favourable terms and conditions for Britain. Meanwhile, across the channel, EU officials have thus far been reluctant to budge on the key sticking point – the Irish backstop. This refers to a plan, weaved into the withdrawal agreement, to avoid a hard border between Northern Ireland (which will remain a part of the UK) and the Republic of Ireland (which will remain in the EU). If this was to go live, goods coming into Northern Ireland from elsewhere in the UK would need to be checked to ensure they were compliant with EU standards, which many say is effectively a continuation of a customs union between the EU and the UK. The US has added its two cents, with congressional leaders and diplomats warning the UK that any future US-UK trade deal would almost certainly be blocked by Congress if Brexit affects the Irish border and jeopardises the Good Friday peace agreement, signed in 1998.

It doesn’t appear that resolution will come any time soon. Downing Street has said Mr Johnson will not meet with other EU leaders without them first adhering to his preconditions which are, in a nutshell, that the Irish backstop proposal is taken off the table and the withdrawal treaty that was agreed with his predecessor, Theresa May, is reopened. As it stands, his first scheduled meeting with Mr Macron and Ms Merkel is at the G7 summit in Biarritz at the end of August.

The growing divide between the two sides has pushed Sterling onto a slippery slope. At the time of writing, its losses during the month of July alone were over 4%. Overnight this week, between Monday and Tuesday, the currency crossed the psychologically important EUR/GBP level of 0.91, and continued its descent thereafter. We do not take any directional bets on the currency as it could continue to be pounded amidst the uncertainty. At the same time, the Brexit effect is increasingly being reflected in incoming macro data which shows a weakening economic backdrop: The National Institute of Economic and Social Research (Niesr) warned there was a one-in-four chance the UK is already in recession. This may throw a spanner in the works when it comes to the Bank of England’s plans to raise rates.

Let’s just hope it’s not too late for rationality to prevail, and that we can – in the style of the quintessentially British character Mary Poppins, played by Julie Andrews – slide back up the banister, away from the messy prospect of a no-deal departure.

Author: Group Investment Office