Getting Brexit done
The Tory victory in the 12 December election is in line with our scenario should ultimately deliver approval of the divorce bill that Johnson negotiated with the EU in October, meaning the UK leaves the EU in 2020. Along with rising clamour from Scotland for a new independence referendum, one of the thorniest questions in 2020 will be the negotiation of trading arrangements with the EU once the transition period finishes at end-2020. We think the deadline will be extended.
Freshly re-elected prime minister Boris Johnson has been relatively more subdued on the use of fiscal policy during his campaign than when he arrived in government last summer. We still see modest fiscal easing, including extra infrastructure spending, but this could take time to materialise and boost growth.
Our central scenario is for the UK to struggle to grow due to low business investment, falling immigration and weak construction. Any surge in confidence following Johnson’s emphatic election win constitutes an upside risk to this scenario.
We are pushing back our Bank of England (BoE) rate-cut call from the 30 January meeting to the 26 March one and we no longer expected a second rate cut in 2020. The UK economy is still in the doldrums, but the BoE could see in the election as removing uncertainty. Much will depend on the appointment of a new BoE Governor, however.
In currencies, we are adjusting our forecast for sterling slightly higher. After a phase of consolidation, sterling could rise towards USD1.36 per GBP in the next 12 months (versus our previous forecast of USD1.33). We are adjusting our year-end 2020 10-year gilt yield target slightly up—to 0.7% from a previous 0.5%.