Which rabbit will May pull out of her Brexit hat?

There is finally evidence that the current Brexit deal is not even that bad for the economy of the United Kingdom (UK). Unfortunately, the parliamentarians will soon be guided more by emotion than by economic arguments.

British Prime Minister Theresa May received a helping hand for her on Wednesday 28 November brexit plans† The government report 'EU Exit' calculates that the plans for leaving the European Union (EU) will not slow down economic growth very much in the future. May could really use that windfall.

US President Donald Trump had considerably torched her plans 1 day earlier. According to him, these make it a lot more difficult to make good trade agreements with the United States (US). At the beginning of the week, May already received quite a beating from parliamentarians. They threaten to vote against the agreement, under which the 27 leaders of the EU signed last weekend.

Economic damage
The report shows that it is very difficult to understand the economic impact of Brexit. This is mainly because both parties still have to reach agreements on all kinds of matters. If May gets her way on all counts, leaving the EU will have little economic impact on the UK. In this scenario, GDP in 2035 is only 0,1% to 1,3% smaller than if the country were to remain a member.

A more realistic expectation, however, is that May will have to make several concessions. In that case, the economic damage is estimated at 3,9%. That's a bit to swallow, but a lot better than the negative impact of approximately 10% (in the event of a hard Brexit without proper agreements).

Emotion instead of economy
Although a departure with good agreements is in the interests of all parties, it is questionable whether the report will provide May with sufficient support. The House of Commons will vote on the agreement on Tuesday 11 December. For the vast majority of MPs, it seems that emotions are the deciding factor (instead of economic arguments).

The Northern Ireland DUP party fears that the agreements will create a wedge with the mainland; May is making too many concessions in the eyes of true Brexiteers, while other MPs would much rather see the country not leave the EU at all.

Tall hat
If the British Parliament votes down May's agreement, a chaotic Brexit (without proper agreements) will be very close. In that case it goes British pound undoubtedly down. May still has a while to pull a rabbit out of the top hat. She is trying to persuade opposition Labor MPs to vote for her plans.

Maybe she can win the vote of some party members by promising to resign soon? For now, anyone doing business with companies in Britain can at least brace themselves for another pound price shock.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.