Quarterly Brexit Report Q3 2018: Nothing Can Be Ruled Out

Since the UK government released its White Paper in July 2018, outlining its stance on future relations with the European Union (EU), uncertainty surrounding Brexit and the prospects of a No-Deal scenario have increased once again, as the plan was rejected by both the EU and pro-Brexit members of the UK government. Opposition in the UK has centred around the proposed deal being a Brexit in name only (BINO) while the EU views the plan as unworkable, reiterating that it is cherry-picking and undermining the single market. Given this impasse, we also can’t rule out a vote of no confidence in Theresa May, a snap election in the UK, a second referendum, or an extension of the transition period, resulting in uncertainty dragging on for business and consumers.

The October 2018 EU summit was originally earmarked as the month where some sort of agreement was reached, to allow time for UK and EU governments to ratify. However, a lack of progress mainly about the details of the Irish backstop have resulted in December now being the crunch month for an exit treaty to be agreed, just three months ahead of the scheduled Brexit date in March 2019. As the fine details of a deal do not have to be agreed until after Brexit has taken place, another option could be more of a political declaration about what both sides will work towards, with specifics to be fine-tuned during the transition period. A new proposal has also called for the transition period to be extended.

Euromonitor International has increased the probability of a No-Deal Brexit scenario to 38-48%. The delayed Free Trade Agreement baseline scenario stands at 42-52%. A No-Deal Brexit would result from a breakdown in negotiations, which would mean that the UK leaves the EU in 2019 without a trade deal and reverts to World Trade Organization (WTO) conditions with higher trade barriers. It would also mean supply chain disruptions and shortage of some goods in the short-term. In this scenario, uncertainty in the UK increases and investment declines alongside a fall in labour productivity and the value of the Pound, all of which will contribute to UK economic output declining by around 3.0% from the baseline in 2019-2023.

Did you know: In a No-Deal scenario

Economy: The Pound would depreciate by another 10.0-11.0% against the US dollar and the euro, causing further increases in import prices and inflation rising to 2.7% in 2020.

Consumers: The top segment’s real spending growth over 2017-2022 will slow to 15.2% (from 21.5% baseline forecast). In particular, real growth in the top segment’s housing spend will slow to 26.8% over this period (from 33.8% baseline forecast) due to weaker demand and lower price rises, making housing the category on which the top segment is expected to cut back their spending the most in a No-Deal Brexit.

Cities: Over 2012-2017, real disposable income per household edged up by a dismal 3.2% in Leeds compared to the UK average of 7.1%. A No-Deal Brexit would diminish hopes of rejuvenating the struggling northern city’s economy by reducing income and household expenditure.

Industries: The reliance on importing toilet paper and paper towels to the UK could push up the cost of tissue products significantly, if a trade agreement with the EU is not reached. A high proportion of tissue products are imported from EU member state Sweden, thus the No-Deal scenario could have a potentially damaging effect.