The UK government’s defeat over its proposed Brexit deal has thrown the country into yet more political uncertainty. The bill seeking for the withdrawal agreement with the EU was placed before lawmakers in the lower house of Parliament and rejected by 432 votes to 202. The 230-vote defeat is thought to be the largest in the UK’s political history.

Hence, there appears to be several possible outcomes with some likely to take place at the same time. They are: (1) renegotiation; (2) general election; (3) second referendum; (4) extension of Article 50; (5) no Brexit; and (6) Brexit with no deal.

In the event of Brexit with no deal, the impact on the economy will be severe. There is a strong risk of failing into a “short-term recession” with the GDP contracting between 1 and 2 percentage points and larger if there is a stronger impact on supply chain disruptions and general panic. However, the negative impact on the GDP could be dampened if there is an orderly reversion to WTO rules and possibly slow GDP to around 0.1%–0.3% in 2019 and escape from a recession. The pound would fall in a disorderly no-deal scenario around 10% in the near term and as much as 20% over a longer period. In the event of a smooth transition to a deal, market participants would “expect a smaller hit and cause the pound to appreciate”.

Inflation will rise due to the fall in the pound as well as the impact from trading barriers that will push up the prices of inputs and pull down productivity from lower immigration in the immediate term as companies struggle to fill vacancies. So inflation could surpass 3% and remain persistently above the 2% target over the next few years. The BoE is unlikely to raise interest rates if much of the inflation comes from a temporary dive in the pound. But if inflation is driven by the sudden supply disruptions, it could then be forced to act, raising rates despite the economic slowdown.

• The UK government’s defeat over its proposed Brexit deal has thrown the country into yet more political uncertainty. The bill seeking for the withdrawal agreement with the EU was placed before lawmakers in the lower house of Parliament and rejected by 432 votes to 202. The 230-vote defeat is thought to be the largest in the UK’s political history.

• What happens now? The government has just three working days to map out a new plan of action. As the Parliament is not set to sit on Friday, this means a new plan must be agreed with Europe and presented to UK lawmakers by the close of business on Monday, 21 January.

Source: AmInvest Research - 16 Jan 2019