Brexit bill in ‚Äúping-pong‚ÄĚ mode while momentum wanes
Evidence of fading momentum supports projections of a slowdown in the second half of 2017 as well as a bearish GBP stance, writes David A. Meier, Economist, Julius Baer
Wednesday last week, the House of Lords, the UK’s upper house, voted in favour of an amendment to the Brexit bill. This amendment aims to secure civil rights for EU citizens already residing in the UK. The Bill had previously passed the House of Commons, where the conservative party holds an absolute majority, without any comment. While the House of Lords’ vote was presented in media as a “defeat” to Prime Minster May’s plans, we evaluate the situation as less dramatic. The amendment, which would force May to present a plan on how to protect EU citizens within three months of triggering the Brexit, indeed contrasts with her plans to do this only once EU member states have accepted reciprocal deals, guaranteeing rights of UK citizens in EU countries. Furthermore, from a tactical point of view, it seems impractical having to make pre-emptive concessions towards the EU.
However, it is not a devastating blow to May’s plans: She is still entitled to seek a “hard Brexit”, leaving the EU single market and restore access through a free trade agreement. Therefore, markets’ reacting to the news was rather calm, with some limited pound-softening, and not perceived as a relief, such as forcing May to a softer shape of Brexit. The bill is now in the “ping-pong” phase, back at the Commons, who may either accept the amendment or delete it and pass the bill back to the Lords - a repeating process until both chambers accept. Mrs May wants the amendment to be removed, but the outcome is hardly predictable. It is possible that the House of Lords will backpedal in order not to take the blame for delaying the process, while Prime Minister May cannot allow to demonstrate political weakness ahead of tough negotiations with the EU.
The ping-pong phase has the potential to delay the clearing of the bill and previous expectations that May will present her letter on the EU summit commencing this Thursday will not come true, we believe that the timeline to invoke Article 50 by end of March can still be held. Meanwhile, leading indicators are showing first signs of deterioration, suggesting that the Brexit is slowly beginning to bite. After months of positive data surprises where negative views on the Brexit’s consequences for the UK economy had to be justified, we could be finally experiencing the rolling-over of economic momentum in the UK.
This supports our GDP outlook of flat growth in the second half of 2017, with growth fading to an average of 1.4 per cent for the full year. Furthermore, our bearish view on the pound sterling, with a target of EUR/GBP 0.92 over the 12-month horizon also prevails. Last but not least, this Wednesday’s spring budget statement will unlikely show a turning away from the overall stance of fiscal austerity. Post-referendum strength indeed causes better fiscal numbers and will allow the presentation of a GBP 550 million boost for innovation and technology spending. Nevertheless, Chancellor of the Exchequer Hammond believes that “gas in the tank” is needed facing the Brexit fallout.