Macroeconomy

Johnson wants to talk

Our base scenario is that the UK will ask for an extension of the Brexit deadline beyond the end of this month. Political uncertainty still hangs over sterling.

Thomas Costerg, senior economist & Luc Luyet, currency strategist

Johnson wants to talk

Having sent a modified divorce plan to European leaders, British prime minister Boris Johnson aims to hold bilateral meetings with European heads of government in the coming days, ahead of the crucial 17 October European Council summit. 

That Johnson wants to talk is encouraging, but the devil is in the detail and his proposals on Northern Ireland are probably not enough. The big sticking point is the question of a potential hard border in Ireland. Johnson’s new plan is to keep Northern Ireland in the EU single market (meaning common regulations with EU) but out of the EU customs union and out of the EU value added tax regime, which would de facto lead to a border on the island of Ireland.  The EU’s chief negotiator on Brexit, Michel Barnier, has indicated that the proposal falls short of the EU’s requirements.

While we do not exclude Johnson making further concessions  to increase the chances of a deal with the EU, at this stage our base case scenario remains that the EU will judge Johnson’s plan unworkable and that the British prime minister will have to ask for an extension of the 31 October deadline to 31 January, as a law recently passed by parliament stipulates. This extension is likely to be granted, in part because Johnson is seen as willing to talk, and in part because the EU is facing strong economic headwinds even without Brexit. Ultimately, we expect an early general election in the UK sometime around January 2019.

Longer term, we continue to think the UK will end up leaving the EU with a divorce deal close to the one devised by Theresa May last year. We also think the UK will remain in a close trading arrangement with the EU in the longer run. (We do not expect a major US-UK trade deal or an alignment with the US on health and safety standards).

A deal with the EU would likely lead to sterling appreciating towards USD1.30 per GBP. However, our base scenario is still for USD1.23 per GBP in three months’ time given ongoing political uncertainty and a probable rate cut by the Bank of England in November. Sterling could strengthen to USD1.28 per GBP in six months if a general election ultimately opens the way for ratification of a Brexit deal with the EU.

Read full report here.

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