- A number of City analysts now say they do not believe hard Brexit will happen.
- The Conservatives’ election loss, plus Labour’s turn toward the Single Market, has strengthened the pro-Europe majority of MPs in Parliament.
- There are only about 50 MPs who are hardcore eurosceptics. The rest are soft Brexiteers or outright Remainers.
- If an election were held today, Labour would end up with a working majority in the House of Commons, so Theresa May cannot afford to anger any more voters, according to YouGov.
- There is not enough time to negotiate a free trade deal with the European Union, so Britain must either accept hard Brexit or an off-the-shelf arrangement like the EEA.
- The government is already compromising on issues like a transitional period that keeps Single Market trading relations in place, acceptance of some aspects of European Court of Justice law, and acknowledging that the UK must pay a divorce bill.
- Wages are stagnant, inflation is rising, and the economy is growing weakly — none of these factors paint an economic scenario that is supportive for a government going for hard Brexit.
LONDON — Hard Brexit just isn’t going to happen, according to Credit Suisse analysts Sonali Punhani and Neville Hill.
They told clients they should expect a “soft transition” with the EU until at least 2021, that maintains the status quo.
“Membership of the single market and customs union now looks very likely, in our view. [And] there is a rising probability that such a temporary ‘soft transition’ ossifies into a permanent arrangement.”
The reason: There are just too many logistical, political and economic factors trending in favour of soft Brexit, and almost none blowing the other way.
Their note is titled “Bretreat.”
The Credit Suisse team is not alone.
All summer, like a dripping tap, one analyst after another — at Morgan Stanley, HSBC, Pantheon Macroeconomics, and Credit Suisse — has published research on why they see hard Brexit receding from view. Their conclusions are a stark contrast to what people read in the media, or hear in commentary from Foreign Secretary Boris Johnson and backbench Conservative MPs like Jacob Rees-Mogg.
“We think this noise is a distraction”
That stuff is just “noise,” Punhani and Hill say, and should be ignored in favour of the reality beneath the surface:
“We think this noise is a distraction. Since the June general election we think there have been several meaningful shifts within UK politics that materially increase the probability that the UK will remain in the single market after 2019, possibly for a long time. And those shifts also mean the risk of a ‘hard’ Brexit in 2019 or beyond is diminishing.”
There is one big reason why hard Brexit — an exit from the EU without any of the bloc’s Single Market or Customs Union advantages — is increasingly unlikely: Prime Minister Theresa May only has 13 months left to get a deal, which must be reached by October 2018 in order for a draft accord to be ratified by the EU before the Article 50 deadline expires in March 2019. That timetable is simply too small for the UK to negotiate.
“That would leave just nine months for agreement … Trade deals usually take years”
Pantheon Macroeconomics analyst Samuel Tombs thinks the timeline is even shorter — only nine months:
“The absence of any progress on the first round of talks so far means that they likely won’t be wrapped up in October, as both sides originally hoped. December is now considered the most likely date for talks to move on to a future trade deal. That would leave just nine months for agreement, as it will take about six months for E.U. member states to ratify the deal with their national parliaments. Trade deals usually take years, not months, to thrash out, so the only realistic way the U.K. will be able to avoid a cliff-edge is to remain in the single market and accept all the associated financial, legal and migration obligations.”
Assuming no deal is reached in 2018, Britain’s choice will either be to take a soft Brexit package deal — such as EEA or EFTA membership — or hard Brexit.
Hard Brexit is not tolerable to a majority of MPs.
The House of Commons retained a solid pro-Europe majority despite the June election. This is Morgan Stanley’s chart of Leave vs. Remain in Parliament:
“We expect the EU to force a choice between a soft or a hard Brexit which divides the government, likely triggering early elections”
Morgan Stanley analyst Jacob Nell and his team told clients on September 3 to expect another general election in 2018:
“We expect the EU to force a choice between a soft or a hard Brexit which divides the government, likely triggering early elections, a growth standstill and a debate on easing policy. A softer Brexit does now look somewhat more likely, but we lack conviction, since we think the Brexit outcome will depend on the outcome of a future election, and recent UK elections have delivered unexpected results.”
Such an election would deliver a Labour government with a very narrow working majority, assuming it could put together a coalition with the pro-Remain Scottish National Party, the Liberal Democrats, and the Green Party, according to this analysis by Credit Suisse:
“We already see some evidence of a shift”
The political reality is that May will need to deliver a Brexit deal that is palatable to the existing remain majority if she wants to avoid calling another election that she would surely lose.
And even if Theresa May were to survive such an election, “multiple constraints work against a hard Brexit,” Nell and his team say:
“Clearer evidence of a Brexit-related slowdown in the UK economic data strengthens the hand of those calling for a ‘jobs- first’ Brexit. We think that these factors — parliament, negotiations, economy — will drive a realignment, with the UK pursuing a softer version of Brexit.”
“We already see some evidence of a shift, with the UK government more explicitly acknowledging financial obligations to the EU and the possibility of an ongoing role for the ECJ after exit, and the UK opposition party coming out in favour of staying in the single market and the customs union until a final agreement has been reached.”
And then there is the money.
As this chart from HSBC shows, our closet and biggest trading partners are all in Europe or, in the case of the US and Canada, governed by EU trade treaties:
Offsetting a loss of EU trade “would require a 68% rise in UK exports to China”
“66.3% of UK imports are currently tariff-free,” according to HSBC analysts Douglas Lippoldt and George A. House. They have published a series of notes describing how difficult economic life will become for Britain if it is relegated to the bottom-rung of international trade as a mere member of the World Trade Organisation.
EU tariffs on external goods run between 5% and 15%, they say. Losing even a small percentage of that would require gigantic trade increases with other partners. “Offsetting a 5% fall in UK goods and services exports to the EU would require a 68% rise in UK exports to China,” they told clients earlier this summer.
Pantheon’s Tombs thinks the economy is already worsening, a key ingredient in the soft Brexit scenario. At the end of August he wrote:
“More evidence has emerged that uncertainty about the U.K.’s future trade ties is harming the economy. Last week’s second estimate of Q2 GDP confirmed that output rose by just 0.3% quarter-on-quarter, the slowest rate in the G7, for the second consecutive quarter.
… As a result, politicians now can be certain that a Hard Brexit would damage the economy and that a further slump in sterling wouldn’t provide any compensation for the imposition of trade barriers.”
Even the analysts who think the government is likely to get a deal are becoming nervous. Oxford Economics’ Andrew Goodwin has maintained throughout the summer that he believes the UK can get its own free-trade with the EU by March 2019.
However, between June and now, he reduced his estimated the likelihood of that deal occurring from 37% to 32%. “The additional timetable pressures mean there is a greater chance of failure than there was before.” He now puts WTO status — i.e. no deal — at a 40% likelihood.
Put that all together — the politics, the timeline, and the economy — and that’s why the City believes soft Brexit will eventually materialise out of the fog. “Although the EEA may seem an unrealistic option at this stage, things could change. If the UK economy markedly worsens in the coming year, then the EEA could become more palatable to MPs and voters,” Lippoldt says.
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