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By Neil Staines on 07/11/18 | Comment

"...it is, perhaps, the end of the beginning” Winston Churchill


Over recent months, as the commentariat have lurched from one Brexit disaster scenario extrapolation to another, we have maintained the consistent view that a deal will be done. At the same time, without getting drawn into the hyperbole, we have maintained that it is likely in neither side’s (EU, UK) interest to resolve the negotiations at any time before the very last moment - "None of the protagonists will wish, in retrospect, to have been viewed as not trying hard enough to secure the best deal”.


Over recent days, there seems to have been some movement from both sides towards a common ground that will enable the Withdrawal Bill to be passed to the UK Parliament this year. There are a number of important points in this regard: firstly, as the official Brexit date approaches (29th March 2019) there is clearly a cut-off date at which a responsible government would have to issue (irrevocable) advice to its populace, companies and organisations of measures to be taken to prepare for a no deal Brexit. We are of the view that this is at or around the turn of the year; next, in order to achieve this timeline, the UK likely have to agree in principle with M. Barnier by the end of this week, such that an EU Summit can be called for this month (likely 22nd-28th November); yesterday, PM May held a Cabinet meeting, in which she likely floated the concept of a ‘review clause’ in a UK wide backstop agreement (in addition to the EU concession of some ‘in-market’ customs checks) that is written into the Withdrawal Agreement itself - with the aim of satisfying concerns of an indefinite, vassal state transition.


In itself, this likely satisfies the EU, and more pertinently addresses the outstanding issue of the Northern Ireland backstop agreement. So in essence, this should shift any fears of a no-deal Brexit scenario to the UK Parliament’s ‘meaningful vote’. Here we are also confident on two bases. Firstly, if we can believe there is likely to be a significant outline / intention / structure of a future trading arrangement (as suggested in the w/e press) then I would place a low probability of parliamentary rejection. Particularly, as the (credible in our view) Sunday Times article suggests that there remains a significant scale of possible future relations (say with Customs Union at one end and Canada at the other - Chequers in the middle). That scale must acknowledge that the greater regulatory alignment there is to be, the greater the access (and lower the ‘friction’).


This morning, the FT reports that "Theresa May has ordered her ministers to make a push for a Brexit deal this week, ordering her attorney-general Geoffrey Cox to prepare the legal fix that she hopes will finally unlock an agreement”, while others published a supposedly (though firmly officially denied) leaked plan to ‘deliver’ an agreed plan to the UK public.


"A rose by any other name…” William Shakespeare


We have suggested for many months that our central case for the basis of the future relationship is Chequers. We maintain that view. It is unlikely that it remains in the exact form that Chequers acknowledges, and we would expect that there is a fairly rapid name change as negotiations get under way. However, until there are further technological advances (Blockchain?) that resolve the NI border issue, close regulatory alignment with the EU seems likely - common rulebook or not.


If we are correct in our expectations that we are in the final stages of convergence towards an agreement, and that the agreement offers sufficient prospects of both access and external trade agreements, then we also remain confident that the UK Parliament will ratify the deal. This would be a very significant watershed for the UK and for GBP.


"There are many ways of going forward, but only one way of standing still” Franklin D. Roosevelt


At the Bank of England meeting last week, most notable to us was not the focus of (almost all) journalists on what the Bank would do in the event of a no deal, but the Bank’s own economic forecasts. The monetary policy statement highlighted the upgraded expectations for the closing of the UK output gap - the Bank now sees excess demand from the end of next year at which point the economy will "run hot”. Furthermore, in addition to what we see as a strong macroeconomic backdrop for the UK, the Bank added two further potential upside stimuli. The first, that the Budget (contingent on a deal - and thus no revisions to the Budget maths) "has the potential to be a significant impact” and, secondly, that a Brexit deal "could help unleash pent up investment”.


From our perspective, the significantly reduced prospect of a no-deal scenario, the firm macroeconomic backdrop (Q3 growth was around three times the equivalent for the eurozone), the Budget stimulus, and the potential ‘unleashing’ of business investment are all significant positives for the UK and specifically for GBP. If we add the fact that we believe GBP is significantly undervalued, that case is further enhanced.   

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