Last week’s High Court ruling that the UK Parliament must approve Article 50 triggering opened up more Brexit scenarios. The court verdict seems unlikely to prevent Brexit, but it could delay it, which might help near-term growth. The case does not change the migration/single market trade-off facing the UK. Our base case assumption remains ‘hard Brexit’.
Our base case remains the UK is leaving
A soft or hard Brexit, delays, an early general election? Last week’s High Court ruling that Parliament must approve Article 50 triggering opened up scenarios. There are few issues more important for the UK economic outlook than the timing/type of Brexit. So in this note we outline some of those potential scenarios and consider their economic effects. Our base case assumption remains that Article 50 is triggered, if not in March then by mid-year, and the UK eventually leaves the single market and customs union (a ‘hard Brexit’). Estimates suggest that could detract 5% or more from GDP over 15 years.
Court case unlikely to prevent Brexit but could delay
If the government wins its appeal, then Article 50 will presumably be triggered by PM May’s March deadline. If the government loses, then most scenarios have Parliament approving Article 50 triggering anyway. But parliamentary process could add delays. Economically negative uncertainty would last longer, although the possibly larger economic shock of triggering Article 50 would be avoided for longer, which could help near-term growth.
Trade-off not changed
The court case opens up the possibility of scenarios in which parliament attempts to soften Brexit a little. So the verdict was, in our view, economically positive, but only at the margin. Parliament may not impose substantial constraints while the EU is unlikely to agree to everything the UK parliament wants: the almost binary trade-off the UK faces between migration restrictions and single market membership is unchanged by the court case. A ‘hard Brexit’ remains our base case.
General election chances seem to have risen
If the government finds parliamentary constraints too onerous, it may want to call a general election. Recent polls indicate an election could boost the ruling Conservative Party majority and thereby increase the mandate for a ‘hard Brexit’. We do not factor this into our economic forecasts.
Transitional deal is important issue
Article 50 talks do not have to cover future trade terms, though they might, and any trading deal is unlikely to be finalised within the 2-year negotiating period. So a transitional deal, to prevent a cliff edge for trade terms on formal Brexit, is possibly one of the most important issues at present. Parliamentary involvement may make this more of a priority. But a deal may not come early and agreeing one at all could be difficult.
US elections add uncertainty
There is much uncertainty about what policies Donald Trump would enact, as our US colleagues describe (see here). But a potentially more isolationist America could trigger more European unification and bridge building. London may want to offset more uncertainty from the US side while the other Europeans may want to take account in negotiations of the UK’s strategic capabilities. That could suggest a softer Brexit, although, equally, euro-sceptics could feel emboldened by Trump’s victory.
Robert Wood UK economist, Merrill Lynch
