“In a no-deal scenario, the potential damage to the UK economy could be offset by the positive impact of lower GBP on exporters’ earnings.”

Prime Minister Boris Johnson has chosen a more aggressive negotiation technique than predecessor Theresa May, flagging the UK’s readiness to exit the European Union without a transition deal (current deadline is 31 October) if the withdrawal agreement that May reached with Brussels is not improved to match his demands. Furthermore, Johnson has curtailed parliamentary time to reinforce his ‘no deal’ threat and muffle opposition.

Our base case is still an extension of the 31 October deadline, but the ‘no deal’ risk remains high. While undoubtedly negative for growth, the cost of ‘no deal’ is probably not as dire as the International Monetary Fund’s bleak forecast of 3.5% less GDP growth over the next two years.

Some temporary trading arrangements are likely to be found. In addition, policy levers are likely to be activated in full, both on the monetary and fiscal side.

We think that Boris Johnson’s rise marks a ‘regime shift’ away from the austerity policies of recent years, including during Theresa May’s time as prime minister. Brexit aside, we see a broad change in mentality within the Tory party (and beyond), which means that the purse strings could be loosened in the coming years, Brexit deal or not (but the shift could be accelerated by a no-deal Brexit).

Regarding a potential US-UK free trade deal, we do not think that the US will be the UK’s ‘saviour’ in the case of a no-deal Brexit, even though Boris Johnson enjoys a good relationship with President Trump and the latter has mentioned the possibility of a fast bilateral trade deal.

Should we have a ‘no deal’ Brexit, we believe sterling could go as low as GBP1.10 per US dollar. However, in such a scenario, emergency measures to ‘smooth’ the UK’s exit could support sterling after its initial decline.  In the event of a no-deal Brexit, we would expect a significant easing of policy by the BoE, with a rate cut of 50 bps The 10-year gilt yield could drop to 0.2%.

The impact of a ‘no deal’ Brexit on equities could be muted as 2019 earnings expectations are already meagre across all developed equity markets. In a no-deal scenario, the potential damage to the UK economy could be offset by the positive impact of lower GBP on exporters’ earnings. Any initial slide in UK equities in reaction to a no-deal exit could quickly be reversed by a vigorous policy response by policymakers.

All in all, a no-deal Brexit is a distinct possibility on the 31 October, even though, for now, this is still not our main scenario, which assumes that resistance in parliament will produce a different outcome (the shutting of parliament until mid-October narrows the options of ’Hard Brexit’ opponents, but does not eliminate them).

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