Brexit: Article 50 extension narrowly ‘most likely’

MPs in the House of Commons last Tuesday night voted for the government to renegotiate the Irish backstop with the EU, giving prime minister Theresa May two weeks to save her Brexit plan. The EU has swiftly rejected the overtures insisting no deal is better than no Irish backstop.

The next calendar date in the never-ending drama is Valentine’s Day, when another House vote(s) is expected. Voting will likely be based on:

  • whatever concession (if any) May manages to get from Brussels;
  • pushing through May’s existing deal;
  • an Article 50 extension;
  • leaving with no deal.

The smart money remains on an Article 50 extension, but only narrowly.

Ruth Gregory, Senior UK Economist at Capital Economics, explains:

“Support for Brady’s Brexit amendment in the House of Commons [on Tuesday evening] is good result for Theresa May but is arguably not the best news for the near-term outlook for the economy and the pound as it probably increases the chances of a no deal.

“At least Brady’s amendment, which advocates that the Irish backstop be replaced with ‘alternative arrangements’, might strengthen Theresa May’s negotiating hand with the EU. As such, the chances of her deal may have risen from around 5% to 15%.

More likely, though, is that it simply delays things and keeps the risk of a no deal Brexit on 29th March alive (we’d put the chances at around 30%, up from 25% previously).

“For what it’s worth, we still think that Parliament will try and gain greater control over Brexit if a deal is not in place by 14th February. As a result, we are still assigning a roughly 55% chance to our ‘fudge and delay’ scenario (down from 70% previously). This envisages an extension to the Article 50 negotiating period beyond 29th March and Parliament eventually settling on a softer Norway-plus style or permanent customs union.

“Of course, the probabilities of the Brexit scenarios are subjective and will shift as the politics evolve over the next few days, weeks and months. Cutting through the political noise, though, our sense is that in each of our three Brexit scenarios (‘fudge & delay’, revamped May’s deal and no deal), the economy is well placed to perform better than is widely expected.”

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