There is a lot of uncertainty regarding the outcome of Brexit, particularly the economic and market impact of a ‘hard no deal’ Brexit. The probability of a ‘no deal’ Brexit has obviously significantly risen after Boris Johnson’s succession as UK prime minister, given the more hardline, aggressive stance he has adopted over the last month or so.
Angela Merkel has given the UK 30 days to come up with a workable alternative to the backstop, which suggests that some compromise is still possible. There are potentially many ‘twists and turns’ in the Brexit story between now and the end of October, although the risks of a ‘no deal’ outcome have clearly risen and are now probably closer to 50/50.
If Johnson is true to his word and the EU does not give the concessions he is demanding in relation to the backstop, the UK will leave the EU on 31 October with no deal. But the majority of UK MPs have shown on several occasions that they are against a ‘no deal’ Brexit outcome. Parliament can try to prevent this occurring, principally through two routes.
Route one – a vote of no confidence
The first route is a vote of no confidence in the government – Labour have suggested they will do this shortly after parliament returns in early September.
Route two – extend article 50
Another way for parliament to prevent a ‘no deal’ outcome would be to legislate to force the government to seek another extension of Article 50 before the end of October.
Alternatively, Boris Johnson could call a general election if he believed that he was likely to lose an upcoming vote of no confidence. He might also take this course if he believed parliament was moving towards a position that would force him to seek an extension of Article 50, resulting in the UK remaining in the EU beyond 31 October.
How could the economy and markets be affected?
In terms of the economic and market impact of a worst-case ‘no deal’ scenario, there are wide-ranging opinions. In terms of the impact on the UK economy, estimates have ranged from a negative impact of 1–2% to a hit of as much as -8% to UK GDP over the first year, as estimated by the Bank of England in its scenario analysis last year. We think a more realistic impact would be a negative hit to UK GDP of 4–5% over two years.