ITR Experts Say: Brexit Breaking Down Near the Finish Line

At the time of this writing, it appears that United Kingdom Prime Minister Theresa May will be unable to pass her Brexit deal through Parliament prior to the March 29 deadline for the UK to formally depart the European Union.

This almost assuredly means that the UK will have to pursue an extension to its EU membership, which could last several months or more. The alternative would be a no-deal Brexit, the abruptness of which would create immense confusion and uncertainty regarding the political, regulatory and tariff landscape, a costly scenario for all involved.

Prospects for finalizing the deal are thin. It had already failed to pass two prior votes in Parliament when UK House of Commons Speaker John Bercow essentially barred it from coming up for a last-minute vote before the final deadline. Invoking a statute, the speaker demanded May’s Brexit deal undergo a material overhaul before appearing before Parliament for a third vote. With the deadline less than two weeks away, this is a tall order.

Such developments are unfortunate for both the UK and EU, as the underbellies of both economies are softening, and the weight of Brexit’s uncertainty is becoming heavier for both as they move through the back side of the business cycle.

UK Industrial Production is currently up 0.5% on an annual basis, but the favorable year-over-year comparison is diminishing. The last time the UK economy was growing this slowly was July 2016, immediately following the initial referendum that started the Brexit process nearly three years ago. However, back in 2016 the UK economy was able to recover from the initial shock and volatility, and it maintained a growth trend that continued to this day. Our analysis confirms that the UK will not be able to do the same in 2019, as the latest monthly and quarterly trends have already fallen below year-ago levels.

It is often said that uncertainty is the enemy of investment. The UK and EU find themselves surrounded by the former, both at home and — with the global community in a well-defined Phase C, Slowing Growth, trend — at the global level.

Read the latest ITR Advisor™ topical article to see what the leading indicators are saying for the UK and the EU in 2019. 

Connor Lokar
Economist