What the UK election means for Brexit How the election could impact the Brexit process, UK economy and financial markets THINK Economic and Financial Analysis 11 November 2019 Follow us ing.com/THINK @ING_Economics What the UK election means for Brexit How the 2019 UK election could impact the Brexit process, the UK economy and financial markets Watch: Get Brexit done! Really? Inside this slidepack Part 1: What the UK election means for Brexit in seven scenarios How December’s UK election could impact the Brexit process, the UK economy and financial markets (GBP and UK debt) Part 2: The moving parts in the race for No. 10 Why December’s general election could produce some surprising results Get in touch James Smith Economist, Developed Markets +44 20 7767 1038 Chris Turner Global Head of Strategy +44 20 7767 1610 Petr Krpata Chief EMEA FX and IR Strategist +44 20 7767 6561 Antoine Bouvet Senior Rates Strategist +44 20 7767 6279 Find all our analysis at ing.com/THINK ING Economics – What the UK election means for Brexit 1 Seven scenarios for Brexit after the UK election Large Conservative majority Solid Labour-led minority government Conservative (+DUP) minority government • Easy to pass withdrawal agreement bill and • Conservatives fail to secure majority. Labour • Conservatives fail to gain a majority. Party UK leaves EU at end of Jan. gains more seats than expected, so has secures DUP support (or less likely Brexit • Crucially it could also give Johnson the more scope to build a stable working Party) but this requires wholesale changes to political breathing space to extend the majority with other parties (most likely using the deal. Realistically, this three-way UK- transition period – and commit to the an informal confidence-and-supply deal). DUP-EU deadlock is unlikely to be broken associated EU budget payments. • Second referendum happens – perhaps on • This leads to more uncertainty and an • Equally if the government decides it doesn’t an accelerated timeline. Article 50 extended. elevated ‘no deal’ risk at the end of Jan, want to extend the transition, it could be • Either UK remains in the EU, or leaves with a echoing September/October impasse very hard for MPs to force an extension – deal (likely ‘softer’ than Johnson’s). 2nd repeat ‘Benn bill’ attempts will be tough. Scottish referendum may be avoided if Labour can govern without SNP involvement. Conservatives try to ‘go it alone’ • Conservatives get the most seats but fall short of a majority and fail to find a partner in Thin Conservative majority Fragile Labour-led minority government Parliament. Labour also can’t form a • Brexit deal ratified and the UK to leave the • Labour government heavily reliant on government. Impasse continues, maybe EU at end of Jan, although the legislation multiple parties to support a thin working leading to another election. ‘No deal’ risk rises’ could be vulnerable to amendment (MPs majority focused only on key policy areas trying to set the direction of trade talks). • Second referendum still likely, but scope for • Johnson could also have limited room to disagreement over the question and process. Labour majority manoeuvre on extending the transition The type of deal that is put forward in a • Labour defies the odds and gains enough period – politically challenging to sign up to referendum will also be controversial. seats. Party still likely to push for a second extra EU budget payments. • Likely that Labour will be reliant on SNP referendum, but bigger focus for markets will • May increase the risk of an abrupt single support - a second Scottish referendum be on their economic campaign pledges (e.g. market/customs union exit in Dec 2020. more likely. Question is when: 2020 or 2021? nationalisation, share ownership) ING Economics – What the UK election means for Brexit 2 Seven scenarios for Brexit after the UK election Market positive • Neutral • Market negative No deal exit Abrupt end to transition Second Brexit Scottish Economic on/after 31 Jan period in Dec 2020 referendum referendum policy Unlikely Fairly unlikely Very unlikely Very unlikely Neutral Large Conservative Deal set to be ratified PM has political space to Deal set to Government not relying Fiscal rules tweaked and majority extend transition be ratified on SNP support modest investment Unlikely but possible Low possibility Unlikely Very unlikely Neutral Thin Conservative Deal ratified but bill could EU budget payments may Deal likely to Government not relying Fiscal rules tweaked and majority meet tricky amendments prove too controversial be ratified on SNP support modest investment Possible Possible Low possibility Very unlikely Neutral Conservative (+DUP) Deal rejected, but MPs But Parliament may Deal fails, Johnson opts for Government not relying Modest spending increase minority government could block ‘no deal’ again try to force extension this as ‘least worst’ option on SNP support but risk MPs block budget Very possible Possible Unlikely but possible Unlikely but possible Neutral Conservatives try Govt could fall apart. Risk But Parliament may Govt vulnerable – risk of If there’s another election Without majority, budget to ‘go it alone’ of accidental ‘no deal’ try to force extension another election & SNP holds key to power gets stuck in Parliament Unlikely but possible Fairly unlikely Likely Likely Modest changes Fragile Labour-led If government falls apart, Transition extended if Can opposition parties Q is whether it happens Expansionary policy, but minority government nd Hung Parliament Hung ‘no deal’ risk could return voters back deal in 2 ref agree on the process? before/after 2nd Brexit ref scope of reform limited Unlikely Unlikely Highly likely Reasonably likely Some changes Solid Labour-led Second referendum Transition extended if Choice between softer Depends if SNP Some bold reform, looser minority government likely. Article 50 extended voters back deal in 2nd ref deal and ‘remain’ hold key to power fiscal policy Unlikely Unlikely Highly likely Unlikely Big changes Labour majority Second referendum Transition extended if Choice between softer Government not relying Nationalisation, changes likely. Article 50 extended voters back deal in 2nd ref deal and ‘remain’ on SNP support to share ownership ING Economics – What the UK election means for Brexit 3 Sterling and UK gilt yields under each scenario Market positive • Neutral • Market negative Immediate/short-term (Dec) First-half 2020 (Feb-June) Second-half 2020 (July-Dec) Deal ratified Transition uncertainty Transition extended until 2022 Large Conservative EUR/GBP: 0.83 GBP/USD: 1.33 EUR/GBP: 0.85 GBP/USD: 1.32 EUR/GBP: 0.82 GBP/USD: 1.38 majority 2Y yield: 0.50% 10Y yield: 0.75% 2Y yield: 0.75% 10Y yield: 0.88% 2Y yield: 1.00% 10Y yield: 1.00% Deal ratified Transition uncertainty Transition not extended by June deadline Thin Conservative EUR/GBP: 0.84 GBP/USD: 1.31 EUR/GBP: 0.88 GBP/USD: 1.27 EUR/GBP: 0.93 GBP/USD: 1.20 majority 2Y yield: 0.38% 10Y yield: 0.68% 2Y yield: 0.75% 10Y yield: 0.88% decision Transition 2Y yield: 0.75% 10Y yield: 0.88% No deal risk rises amid impasse Art. 50 extended, repeat election possible Uncertainty persists Conservative EUR/GBP: 0.90 GBP/USD: 1.20 EUR/GBP: 0.90 GBP/USD: 1.22 EUR/GBP: 0.90 GBP/USD: 1.24 minority (DUP/alone) 2Y yield: 0.25% 10Y yield: 0.50% 2Y yield: 0.50% 10Y yield: 0.75% 2Y yield: 0.68% 10Y yield: 0.88% Second referendum likely – unstable govt Referendum process drags on UK votes to leave (softer deal). Election? Fragile Labour-led EUR/GBP: 0.83 GBP/USD: 1.33 EUR/GBP: 0.87 GBP/USD: 1.29 EUR/GBP: 0.81 GBP/USD: 1.40 minority government 2Y yield: 0.50% 10Y yield: 0.75% 2Y yield: 0.50% 10Y yield: 1.00% 2Y yield: 0.68% 10Y yield: 1.13% Optimism on referendum Uncertainty as Brexit referendum set-up UK stays in EU albeit Scottish risk remains Solid Labour-led EUR/GBP: 0.80 GBP/USD: 1.38 EUR/GBP: 0.84 GBP/USD: 1.33 EUR/GBP: 0.78 GBP/USD: 1.45 minority government 2Y yield: 0.50% 10Y yield: 0.88% 2Y yield: 0.50% 10Y yield: 1.00% result Referendum 2Y yield: 0.75% 10Y yield: 1.25% Economic policy concerns Focus switches from policies to second ref Softer or no Brexit but bold policy Labour majority EUR/GBP: 0.90 GBP/USD: 1.22 EUR/GBP: 0.86 GBP/USD: 1.30 EUR/GBP: 0.86 GBP/USD: 1.31 2Y yield: 0.50% 10Y yield: 0.75% 2Y yield: 1.00% 10Y yield: 1.25% 2Y yield: 1.25% 10Y yield: 1.50% ING Economics – What the UK election means for Brexit 4 What the UK election means for Brexit An in-depth look at seven scenarios ING Economics – What the UK election means for Brexit 5 The new ‘no deal’ – The risk of an abrupt end to the transition period The UK needs to pay into the next EU budget to secure an extension to the transition period beyond December 2020 Default: UK (ex NI) leaves single 2020 market and customs union Feb-June or Initial trade talks will quickly turn to money Transition extended to 2022, 12 December 31 January 30 June 2020 subject to EU budget payments Election date Current Brexit date. If Deadline to extend transition Conservative majority, deal period, set out within 31 December 2020 likely to be ratified before then withdrawal agreement Current end date of transition period Things that need to happen to ensure smooth exit in December 2020 – why an extension is likely Hire staff to operate new customs, Implement new checks/controls on Negotiate free-trade agreement with goods flowing between GB and the European Union – Michel Barnier regulatory checks at the UK entry points Northern Ireland.