Brexit podcast: Second meaningful vote disagreement leads to another cliff edge

13 Mar 2019

Phil Shaw

Chief economist, UK

Lindsay Williams talks to Investec Chief Economist Phil Shaw about the fallout of Tuesday night's second "meaningful vote". Theresa May's deal was once again voted down, drawing up a number of questions as to where the UK goes from here. 

Listen to our analysis

Phil Shaw runs through the context of Tuesday night's vote and the looks ahead at the possible scenarios facing businesses

Question

Due to Brexit concerns, it's known there has been a degree of stockpiling which has impacted the supply chain. It could be seen that this is supporting economic growth in the last few months. However, post-Brexit this might unwind, could this then have a reverse effect?
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About the author

Philip Shaw

Philip Shaw

Chief Economist, UK

Philip graduated with an Economics degree from Bath University and a master’s in Econometrics from the University of Manchester. He is a regular commentator on the economy and financial markets in the press and on TV. Philip joined Investec in London in 1997 and heads up the Economics team there.

Read the transcript

Lindsay Williams: Thank you very much and good morning, everybody.  Welcome to this Investec Brexit vote, the final vote.  And after the final vote, there is a very prominent question mark.  This is a conference and will be a podcast later on.  I’m Lindsay Williams. I’m speaking to you from Rotterdam in the Netherlands. 
 
With me is Phil Shaw, and he’s on the line from Investec in London. Chief economist at that institution. Phil, I have to say one thing, before you set the scene, last night, I started to become worried, then I became depressed, then I became angry, and now I’m confused. 
 
And that is from a person who has been a Brexit agnostic up until now .I can imagine that these sorts of feelings are across the United Kingdom at the moment.
 
Phil Shaw: Yes. I think that’s certainly the feeling that we’ve got in this room, here at Investec.  And one would imagine that that’s transmitted very much more widely across the country at the moment, as well. 
 
LW: Indeed.  We’ve had two votes; we’ve had two defeats. The margin of defeat was narrowed last night.  It went down to 391 to 242.  Can you go back a little bit and set the scene, before we look forward, please?
 

The second meaningful vote: how did we get here?

Yes.  Let me give you a little bit of a background towards the vote last night.  And welcome, everybody, and thank you for joining us. Really, the second meaningful vote last night isn’t going to be the final vote, and I’ll come to that a bit later on.  The principle issue in the vote on the deal was the Irish backstop. 
 
 
And in short, that’s the mechanism that’s been suggested to keep the border between Northern Ireland and the Republic open, if the long-term trading arrangements, once the UK has left the EU, fail to do so.  And that’s envisaged to be a temporary customs union between the UK and EU until everything’s sorted out. 
 
And in addition, there’d be some regulatory alignment between Northern Ireland and the EU.  Now, the objections mainly come from the right wing of the Conservative party, the so called European Research Group, or ERG.  And their concern from the vote in January was that the UK will be trapped involuntarily in this backstop, with no unilateral right to withdraw. 
 
 
Last minute changes were agreed at negotiated level on Monday, and in short, they would not give the UK the unilateral right to walk away under any circumstances.  But what we’ve seen is a beefing up of the arbitration mechanism to ensure that the EU is negotiating with best endeavours.  That they’re not trying to hold the process up. 
 
 
And I don’t think that message was really appreciated by MPs. And the Attorney General, Geoffrey Cox’s judgement on it was five pages long.  Most people seem to have read the last line, which is to do with an inability to leave the backstop unilaterally.  His actual judgement is a lot more balanced than that. 
 
 
But be that as it may, the loss was by 149 votes last night.  That’s a little bit of an improvement on the 230 in January, but still a disaster for the government.  We actually thought it could be quite close last night, but it wasn’t to be.  We did get 40 Conservative MPs switching and backing the government, as did one Labour MP. But 75 Tories voted against. 
 
And you can do the maths.  If those 75 Tories actually voted with the government, the bill would have gone through.  What’s the process now?  Well, we’ve got 16 days to go until Brexit, or more realistically, Brexit delay.  What we have this evening is that the government is going to propose a motion to reject leaving without a deal.
 
That’s scheduled for around 7pm our time.  We may see some amendments to that before that, but the bottom line is that the Commons has got no appetite to leave without a deal.  And therefore, they will not approve leaving without a deal.  And if you listen to Theresa May in parliament after the vote last night, she was hinting that it would be a free vote, and she would be voting against leaving without a deal.  And that’s why the currency is holding up. 
 
Sterling, when I last looked at it, was a little bit above 1.31 against the US dollar.  And that’s the key.  The moment that markets believe that there’s not going to be a deal, sterling will fall. We don’t think that we will leave without a deal.  There is a risk, but it’s relatively small.  Now, onto the process if the no deal is rejected.
 
The vote will take place tomorrow to request an Article 50 extension.  That is to extend the UK’s membership with the European Union.  The Commons then have to debate how long that extension is going to be and for what purpose. Don’t forget that the European Union is requested to do this.  And all 27 of them have to agree.
 

Is an extension on the cards?

Now, we’ve had some relatively hawkish comments from European leaders over the last 12 hours, but our view is that they certainly would agree to a three month extension.  Beyond that, you run into the problem of the European parliamentary elections, which take place in late May, and that parliament would sit in early July, starting from the 2nd. 
 
So, if, for example, the UK’s extension was to be a year, they would need representation in the European parliament, and would probably need to contest the elections in May, which would be uncomfortable to say the least. So, that’s where we are on the short- term process. 
 
What’s going to happen longer term, and I must say, things, to me, are looking as unclear as they have been now.  We’ve seen talk of everything in the media this morning, depending on what you read and who you listen to.  There’s talk of a third meaningful vote in parliament. 
 
That’s not impossible, although the arithmetic is very difficult. Also, one of an alternative cross-party motion on a different form of deal. And here, you’ve got Nick Boles’ Common Market 2.0.  That’s not impossible.  The Prime Minister being asked to resign by her party.  A second referendum.  A general election.  And, of course, the extension to the UK’s EU membership for a while.  
 

Division within the conservative party

I’ve even heard talk that May will be asked to resign as Prime Minister, but to keep her job as Conservative Party leader, which is a bizarre one from a UK perspective.  Although that is actually the case in Germany at the moment.  We do think that whether you think May’s doing a good job or not, and I know opinions here do vary, that the principle issue isn’t one of personalities. 
 
It’s the fact that you’ve got massive divisions in parliament and an unwillingness to compromise.  And our view is that you could put any of those options on the table in parliament, and none of them would garner a majority.  So, there needs to be some event or some process, which garners a compromise and to get something through.

 
And the Conservative Party is very critical of Theresa May’s messing up the election campaign two years ago, and losing her overall majority.  But even if she’d won an overall majority of a hundred, she’d still probably have lost last night, if you work out the maths.  So, it’s a very, very difficult situation.
 

Should the power go back to the people?

There’s a tempting line of thought, which is, if parliament can’t decide on this, then you should hand it back to the people. But then are you going to get the majority in parliament to hold a referendum?  That’s one issue.  And I do speak to people at Number Ten occasionally, and the view of Number Ten is that a second referendum on EU membership is toxic. And they would do almost anything to avoid doing that
 

Tariffs and borders

First thing this morning, the government released its schedule on tariff structure on what would happen if we left the EU without a deal.  So, as you all probably know, there is tariff free and frictionless trade with the EU at the moment.
 
And no deal would involve applying European Union, what we call WTO or MFN, most favoured nation tariffs, on imports.  And the UK’s exports would face the relevant tariffs with the EU and third party countries with whom we no longer would have a trade deal. Now, in terms of the import tariffs, the government has announced that it would cut a number of them to protect consumers. 
 
I’ve only managed to have a very brief look at the paper, but for example, the government planned cutting tariffs on beef products by an average of 53% compared with the MFN EU tariff.  On Ireland, it’s envisaged that there will be no tariffs between the Republic of Ireland and Northern Ireland for a period of a year. 
 

There would be some sort of checks away from the border, for sanitary reasons on animals.  We haven’t had a response there from the EU, but of course, cutting tariffs is all well and good, but we don’t know what access to the ports is going to be like under a no deal situation.  As I said, a no deal situation is not our baseline case, and we think there is only a relatively small risk that we’ll be faced with that.
 

It's not all doom and gloom for the economy

So, here’s the line of good news.  What we had yesterday, we now have monthly GDP figures in the UK, and they show GDP in January rising by 0.5% on the month. Now, extrapolate that over the year, and that would indicate a booming economy. 
 
 
Clearly, that’s not the case, but what it does suggest on a more realistic basis is that the 0.4% decline that was recorded in December was an erratic. And it’s not a sign of impending economic doom.  So, we were actually quite cheered by yesterday’s number, although, as I said, we wouldn’t take it at face value. 
 
We’ll also get the spring statement from the Chancellor just after 12:30 today, which will fill us in on the official view on the economy. As far as the government’s concerned.  Just to deal with a couple of final points.  On the currency, as I mentioned earlier, as long as the no deal is being seen to be off the table by currency markets, that will support sterling.  It will stop it sliding. 
 
We can’t guarantee there won’t be a no deal situation, but it’s quite a way away from a baseline case.  On interest rates, what we’ve heard from the Monetary Policy Committee is that their intention would be to raise rates slowly over the next two to three years, perhaps with one hike a year.
 
But clearly, the Monetary Policy Committee isn’t going to do anything unless there is some clearer line of sight on what’s happening over the Brexit process.  But for the moment, rates are firmly on hold.  So, in summary, in short, the good news is that we will probably avoid a no deal Brexit on the 29th March.  We’ll probably get an extension. 
 
 
Obviously, we’ve got the votes over this week, but there’s also an EU summit, where we’ll learn more about the EU’s perspective on Thursday and Friday next week.  The bad news is that what we’re not getting away is not a cliff edge, which might be three months away, and we hope that we’re not having a similar sort of conversation as we’re having now towards the end of June. 
 
 
Saying well, we’re not quite sure what’s going to happen.  We’re firmly going to try and lobby appropriate people to try and come to some sort of conclusion.  
 

Theresa May undermined?

LW: That was a great summary, and you’ve answered most of my questions.  But I have to make a comment.  I felt a little bit conned with last night.  It was almost like a Neville Chamberlain peace in our time, waving of the paper moment, when Theresa May came back, sterling rallied because everyone was confident that various legal challenges from the EU had been removed. 
 
And suddenly, Geoffrey Cox, the Attorney General, came along and said, no in his five pages, this is not happening at all.  And to me, that undermined Theresa May’s reputation in my eyes, such as it was, but also, undermines her authority.  Do you think that a removal of Theresa May, either as Prime Minster, or leader, or both, will ease the process or make it more difficult?  
 
PS: My opinion that would be that I’d be slightly kinder to Theresa May and the government generally.  What a lot of ERG members have been saying since the January vote, and indeed, when the withdrawal agreement was signed towards the end of November last year, was that they don’t want to be trapped in the backstop with the EU. 
 
And the Cox judgement really shows that number one, there’s a beefed up arbitration mechanism to prevent the EU from dragging its heels.  And also, the UK has signed a unilateral declaration, which has not been rebuffed by the European Union.  Which gives some weight, in legal opinion, to the UK legally leaving the backstop unilaterally if, in its judgement, the EU is not negotiating a trade deal with best endeavours.  
 
So, I think the judgement on government was very, very harsh yesterday.  If anything, it shows what you shouldn’t do is provide a little bit of a conclusion towards the end of the five page paper.  The summary of which, doesn’t actually give you a fair reflection of the underlying paper. 
 
People just looked at the last line, and judged it on that.  But to answer the question about leadership, no, I don’t think replacing Theresa May at this stage would help at all. Firstly, it’s a question of divisions in parliament, and the conservative party, in particular. Not so much personalities. 
 
And I think the last thing we could do with now is a power vacuum, when senior figures in the ruling party would then be more concerned about winning a leadership election rather than sorting this mess out.  
 

Does the EU even have an appetite for a Brexit extension?

LW: You’re confident that the no deal vote tonight will definite be no?  So, no deal means no, like someone people say Brexit means Brexit.  Does the EU, all 27 countries, have the appetite for an extension, whether it be three months or more? Could we have this extraordinary situation where Spain might say, you messed us around on Gibraltar, we’re going to mess things up by not approving an extension.  Could that be a possibility?  Because people simply don’t have the appetite for it?  
 
PS: There isn’t much appetite in the 27 for an extension. But our judgement is that here is even less appetite for a no deal.  And you can speak to anybody in Ireland, in particular, but I’ve spoken to a number of people elsewhere in the rest of Europe, and they feel the same way. 
 
To be granted an extension, parliament will actually have to put forward a decent case for why they want an extension, and what it’s going to do with the time.  And that will be considered by the EU.  I think what would be off the table would be a successive three month extension every 13 weeks or so, which doesn’t help anybody.  If it came to that, after a while, the EU would say, no, you have to face the prospect of a no deal Brexit to get your own house in order.
 

Is it as toxic as we think?

LW: You mentioned the word toxic when talking about a potential second referendum. But on the other hand, this has been a long, long process since 2016. So, to me, although toxic is what the UK government, or rather the Conservative party thinks, I think it’s actually rather refreshing.  Is there any chance that it could happen?
 
PS: One argument for another referendum might be, well, parliament’s already had two meaningful votes, why can we have two referendums?  Most opinion polls now say, can we just get this sorted out, rather than have another referendum? 
 
People have very different points of view here, but from a practical perspective, the government would feel that its own political support will be eroded, if it held another referendum.  It would lose votes to the new Brexit party, in all probability, which is, if you like, the new UKIP.  I think it would very much be a last resort. In this environment, you say, never say never, but I think there would be considerable political resistance within the government, and indeed, within fairly large sections of the Labour party, not least, the current Labour leader.
 

Could we see a boost in the economy after a conclusion?

LW: Confidence is very important when it comes to markets. It doesn’t matter how many algorithmic trades and computer generated trades there are, the economy and markets are run by human participants.  I tend to find that if I’m feeling a little bit depressed, then the whole of the UK is, and important people in business have gone into their shells over the last couple of years. 
Do you think that if there is a satisfactory conclusion to this whole process, there is going to be an unleashing of a wave of economic activity?  Projects that have been on the drawing board will suddenly be initiated?  And do you think that maybe you’re GDP forecast could be a little bit conservative?
 
PS:  I hope they are.  I have a couple of comments on that.  Firstly, people, certainly households, are saying they’re not confident about the future.  That’s what the consumer sentiment indices are telling us.  But in the UK, we’ve learnt that people say that they’re feeling depressed, but their behaviour is very different, and they’ll carry on spending.  So, I’m not too concerned about consumers.
 
On businesses, it’s a different matter.  And we’ve seen clear evidence now that uncertainty over Brexit is hampering economic growth from, in particular, the perspective of business investment, which has fallen in each quarter of last year.  It’s 3% below where it was a year earlier, and that’s at a time when unemployment’s down at 4% and you’re expecting capex to be really quite buoyant
 
Yes, that, I think, is the main evidence that the economy is being dragged by the Brexit process.  Are we being too conservative?  We do have a rebound in investment over the remainder of the year.  It might be bigger than we’re expecting, and as I said, fingers crossed that that’s the case.  But I would imagine that as long as we avoid a no deal Brexit, we’ll see growth somewhere at 1.5% this year.  Not too dissimilar from last year.  That’s very much our baseline case.
 

Will expats need to start thinking about travel back to the UK?

LW: At times, your words have been soothing.  At times, you’ve sounded exasperated.  I’m sitting in the Netherlands with a UK passport. Are you confident that I will be staying here or do you think I’m going to be on the ferry or the aeroplane in the next year or so?  In other words, are you confident this whole process will sort itself out, as these things tend to do?
 

PS: I wouldn’t go as far as to say I’m confident.  I’m relatively hopeful, particularly in respect of people travelling between the UK and what will then be the EU.  I think government’s everywhere, including the UK, have shown a relatively human response to allowing people to travel across borders. So, even if there is no deal, I would imagine that there won’t be too many restrictions on travel, in that sense.