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Economy & Rates 11/25/2019

Will we have a Christmas Brexit?

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Bruno Cavalier
Chief Economist at ODDO BHF

We were supposed to have Brexit at Halloween. Now we might get it for Christmas or the New Year. After a third postponement, the deadline has been extended to 31 January 2020. In the meantime, a general election will be held on 12 December. Prime minister Boris Johnson is hoping to secure a majority that will approve “his” withdrawal agreement. With the vote three weeks away, he has a clear lead in the polls, but they are fragile. In any case, the no-deal scenario is no longer supported by the Conservative party, even in its most radical wing. The following stage will be to negotiate a free-trade agreement in one year, It bodes to be tricky, or indeed nigh on impossible.

Brexit - the longest and most complicated divorce in history

Since the referendum of 30 June 2016, the Brexit saga was marked by the UK’s exit from the EU being set for 29 March 2019, followed by three extensions of this initial deadline (lhs table). The latest extension is until 31 January 2020. In this article, we are examining what has changed in the Brexit problem1 (new political situation, new withdrawal agreement and a new negotiation phase) and its impact on the economic outlook.

A new political situation: no support for no-deal

The UK parliament formed after the general elections of June 2017 knows what it does not want - a no-deal Brexit. But each time a Brexit deal (withdrawal agreement) was put before it, by either Theresa May or Boris Johnson, it was rejected. The government does not have a majority. The idea of resetting the situation with new elections on 12 December seems to make sense, but is no guarantee that another hung parliament will be avoided.

For the moment, the polls predict a victory for the Conservative party. With a lead of over 10 points on Labour, it could return at least 350 MPs to parliament, with 322 needed for a majority2. But caution is the watchword here. First, the polls can get it wrong if the panel of participants is poorly calibrated. In 2017, Theresa May had an even greater lead three weeks ahead of the election (rhs chart). Second, the electoral system and the political fragmentation could distort how the percentage of the vote translates into the number of seats. Finally, the campaign has only just got started (a debate between Boris Johnson and Jeremy Corbyn is scheduled for this evening).

1 For more details, see our Eco Note of 28 August 2019: “Which costume for a Halloween Brexit?”
2 To translate polling indications into seats, the Martin Baxter model is used: https://www.electoralcalculus.co.uk/homepage.html

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