We know only two things now. First, Brexit most certainly does not mean Brexit. Second, Brexit uncertainty has been inflated to such an extent that the risk of crisis now haunts Westminster, and, by implication, the economy and financial markets. Perhaps, while not wishing it, you could argue that everyone needs a crisis: Theresa May to get her deal through parliament, Brexiteers to raise the chances of a no deal, and Remainers to see the whole thing cancelled. The one place which needs a crisis like a hole in the head is the economy.
The likelihood of May’s deal, running to over 580 pages, being approved by parliament appears to hang by a thread. While May’s fortitude and defiant stance stand in her favour, and it is the only deal on the table, the parliamentary maths is nonetheless stacked against her, and her own position as leader of the Conservative Party is at risk.
We voters gaze at our real-time political thriller in bewilderment, speculating about the likelihood of May’s survival, the fate of the Withdrawal Bill, and the prospects of a second referendum and a general election. But there are no cosy armchairs from which to watch as heightened levels of uncertainty flow through the veins of businesses and the economy.
And the economy is already struggling. According to the latest CBI Industrial Trends survey, business confidence has fallen faster than at any time since the referendum, investment intentions have slumped, and order books have thinned out. The annual change in new car sales fell in October for the seventh consecutive month. House price increases, on average in the UK, have followed a similar pattern. The service industry Purchasing Managers’ Index dropped again in October to the lowest level in seven months.
Companies are becoming more cautious or are already spooked. Royal Bank of Scotland, for example, recently set aside an additional £100m to guard against the risk of loan losses. It won’t be the only financial firm looking to the future with greater angst.
The market in credit default swaps offers a way for investors to hedge against the risk of loss arising from a deterioration in credit quality. By the end of last week, the cost of insuring exposure to UK sovereign debt had doubled in the space of a week, to the highest level since the referendum. Sterling, which had been holding steady around $1.30 for some time, fell below $1.28. UK equity prices like a weaker Pound, but more than usual, domestically driven UK stock prices were distinctly off-colour. Distressed debt—basically cheap liabilities of companies or loan structures that are in deep trouble—has become interesting to investors anticipating trouble.
In a recent 50-tweet chain on Twitter recently, details were listed of companies that had or were about to re-domicile or relocate, including several financial services and insurance companies that had already moved large amounts of assets and operations to EU capitals. The list also cited health care companies facing medicine shortages, and additional costs from duplicate drug testing; shipping and other transportation companies reformulating supply routes; various companies preparing for higher prices, and increased customs and regulatory checks; food companies running into stockpiling bottlenecks; and technology companies running into funding threats.
Some of what we see going on in the economy is cyclical, or demand-related. There is a reasonable view that “demand shocks” come and go, and can be weathered more easily than “supply shocks,” which tend to sap the economy’s capacity to expand or make it more vulnerable to a rise in inflation. Yet it is these supply issues which were always the main threat from Brexit, and from the uncertainty which it would unleash. They are manifested in greater difficulties in doing business, higher costs, more complex border and customs procedures, and more awkward and duplicated regulation and administration. The consequences dampen investment—including by foreign companies in the UK—and weaken economic dynamism and efficiency, productivity, and sooner or later, jobs and living standards.
And here we are. According to the prime minister, Brexit is now a choice between her laboriously negotiated and broadly unpopular deal with the EU27, no deal at all, or no Brexit. The deal could fail first time around but still pass with tweaks. There could be an extension of Article 50 to allow more time. At a stretch, lawmakers could try to apply for membership of the European Economic Area or the European Free Trade Association.
Other than no deal, all options constitute a form of closer association with the EU, which differ in various respects—including with respect to free movement of people—but place a strong emphasis on close goods and services trade links and the preservation of commercial supply chains. This is the only type of “jobs Brexit” that means anything, and whatever its faults, May’s plan certainly has that in the cross-hairs.
For dyed-in-the-wool and uncompromising Brexiteers, the only option—now and since the referendum campaign—is a clean break with the EU and its institutions, aka no deal. Some may say that this is a harsh judgment, and that it might have been or may still be possible to negotiate a different deal with the EU. Yet, not only is this unlikely given the constraints such as the Irish border, but no Brexiteer has articulated an alternative proposal, and the eight full Cabinet members who have resigned from the government, including Boris Johnson, David Davis and Dominic Raab, played a full part in framing May’s tortured structure before welching on it. In any case, the EU won’t be up for renegotiating much if anything before March 2019.
If, as is believed, parliament will vote neither for May’s deal nor for no deal, and Conservative MP’s have no interest in hastening a general election, there is nevertheless an upside emerging from this dizzying gloom. The chances of a second referendum are probably now rising at a time when public opinion on Brexit may be in play more than any time since 2016. Maybe we do need a crisis then, to get certainty in the end.