Brexit votes: We expect the Commons to support an extension
We think the probability of May's deal passing on 12 March is low (15%) although we have seen some softening lately in the Brexiteers' position on the backstop. If, against our expectation, the deal passes, we expect EUR/GBP to move down to 0.83.
We think the probability of the House of Commons voting in favour of a 'no deal' on Wednesday 13 March is very slim, likely 5%, but if it happens, we think EUR/GBP will move back to the old 0.87-0.90 range. Eventually, if the UK crashes out without a deal, we expect EUR/GBP to move towards parity 1.00.
Our base case is that the House of Commons on Thursday 14 March will vote in favour of asking the EU27 for an extension of Article 50 (95% probability). As an extension seems to be priced in already, we think the potential for another move lower in EUR/GBP is limited. From a technical perspective, there also seems to be a lot of support around the 0.85 mark. We expect EUR/GBP to move a bit lower towards, but not below, the 0.85 mark.
Macro outlook: Businesses are hit by Brexit fears
In 2018, the UK economy grew by 1.4% y/y, the lowest growth rate since 2009 when the economy was in recession. Signs in early 2019 are not encouraging either with PMIs suggesting growth of around 0.0-0.1% q/q. The UK economic sentiment index is below the equivalent index in the euro area and is at the lowest level since 2013.
Brexit uncertainty is the main reason why business investments declined every quarter in 2018. While an extension of Article 50 is positive, as it would avoid the UK crashing out of the EU without a deal, it is not only for the better. The period with high uncertainty would be prolonged and what has necessarily changed in 3 month? Even in the case a Brexit deal is approved, we do not have the full details on the future relationship, which is up for negotiations over the next 2-4 years. This also means while investment growth will likely turn positive again, many long-term investment projects will likely stay in the drawer.
Business surveys like PMI and the CBI indicators suggest businesses have activated their contingency plans and are stockpiling goods ahead of Brexit. This limits the potential for higher growth in Q2 and Q3 even in case of a deal is soon approved.
Consumers are not feeling as anxious as businesses. Private consumption grows around 2% y/y, which, however, is slower than before the EU referendum. Everything is not rosy for consumers either. The Brits are the most pessimistic on the economic outlook for the next 12 month in EU28 and overall consumer confidence has declined gradually since the EU referendum.
Based on incoming data, we have updated our GDP forecasts for the UK economy, which we now see at just 1% this year increasing to 1.3% next year (previously 1.2% and 1.4%, respectively).
With ECB on hold over the next 12M, our case for a Bank of England hike in November is also under pressure.
To read the entire report Please click on the pdf File Below..