Brexit: Definitely maybe or maybe not...

27 Mar 2019

Phil Shaw, Victoria Clarke, Ryan Djajasaputra and George Brown

Investec UK economists

...or May to be gone in May? The Investec economics team analyses the state of the global economy in the wake of an important month for the UK and Eurozone. 

United Kingdom

Brexit is now firmly in the sights of international investors. At the time of writing (27 March), Prime Minister Theresa May still faced an uphill struggle in securing parliamentary approval for her deal. If she is able to, the UK will leave the EU on 22 May. Failure to do so would mean a shorter deadline of 12 April.
 
This would probably be preceded by a British request for a longer extension to the Article 50 process of perhaps a year or more. The EU would then attach conditions involving reaching a consensus within the UK on exactly what it wants.
 
Ultimately this could involve another referendum, though we stress that this is not our base case. In something close to a parliamentary revolution, the Commons is now holding a series of indicative votes on alternative ways forward. This just might find a consensus to proceed with a ‘softer’ Brexit. It is not impossible that such outturns galvanise the hardline ERG faction of the Tory party to support the PM’s deal, for fear that Brexit could slide away…
 
There are many talking points here. In short, our view is that the UK will (most likely) leave the EU, but a ‘no deal’ outcome is even more remote. We hope for signs of clarity soon as to when and exactly how.
parliament vote
Brexit events have moved fast. Commons Speaker John Bercow indicated he would not accept the government’s motion for MV3 without substantial changes from the MV2 proposal. In the absence of such a re-write, the UK made an official request to the EU for a Brexit delay beyond 29 March.

Global

Minor nudges to our forecasts mean our global growth forecast slips to 3.3% in 2019 from 3.4%. 2020 stays at 3.5%. Our view of the outlook is increasingly at odds with that of investors, who have been spooked by a combination of persistent weak data and growing dovishness among central bankers. This bearishness has manifested into the 3m T Bill /10y Treasury yield spread going negative.
 
To our minds, such pessimism is excessive and we continue to look for a modest upturn in the latter part of the year on the back of a resolution of the US-China trade dispute and Chinese stimulus. We are, however, eyeing the risk that weak sentiment could be self-fulfilling, blowing the global economy off course (though this is far from our central case).

United States

We look for 2.3% US GDP growth in 2019 whilst we look for 1.8% next. Overall, notwithstanding the likelihood of a poor Q1 2019 GDP reading, the pace of expansion looks set to moderate rather than decelerate sharply over the next 18 months. Here, a “patient” Fed reduces the risk of faster slowdown; we see just one rate hike this year.
 
The Fed’s patience is likely being influenced by its policy framework review, focusing minds on the softness of inflation. And it could pave the way for the FOMC to “make up” for periods of below-target inflation. On the political stage, we are beginning to size up the 2020 Presidential race. Here political polarisation might mean markets are faced with polar outcomes in terms of what the candidates represent.
Richard Clarida
We wonder if a framework review led by FRB Vice-Chair Richard Clarida is focusing minds on the softness of inflation readings with policy makers considering whether the Fed should make up for periods of below-target inflation with periods of above-target price rises.

Eurozone

March’s Governing Council meeting saw the ECB take a decidedly more dovish tone, introducing its third targeted longer-term refinancing operations (TLTRO-III) and updating its guidance to all but rule out a hike in 2019. We continue to expect a 20bp hike in the deposit rate to -0.20% in March 2020, but note that a possible ‘tiering’ of the deposit rate is becoming more likely amidst prolonged negative rates.
 
Our ECB view and therefore our view of the euro’s likely path remains very much dependent on a recovery in economic activity through the year. To date, indicators have remained mixed, but we maintain our GDP forecasts at 1.3% (2019) and 1.7% (2020). Similarly, our €:$ forecasts have been maintained at $1.15 for Q4-2019 and $1.22 for Q4-2020.