Scenario 3: forced general election
As the 31 October deadline approaches, political pressure in the UK will intensify with opposition parties and some Conservative MPs seeking to stop a no-deal Brexit. Some
Conservative MPs have threatened to vote alongside parties in a no confidence motion that would bring down the government and force a general election.
“Generally, politicians don’t bring down their own PM, but tensions are high. A number of Conservative MPs are implacably opposed to no-deal, and the Conservative government has a miniscule majority in parliament. While the rightwing of the party is largely united behind Johnson, any concession given by Johnson might fracture that unity. If Johnson seems likely to lose a no confidence vote, he might just call an election anyway.
“Following a general election, a referendum and no Brexit would become possibilities.”
Potential implications for investors
In terms of no-deal planning, the UK can make whatever plans it likes, and these may smooth things on the UK side. However, the UK cannot plan or make legal changes on the EU side.
“The EU would be required under WTO rules to treat UK exports in the same way it treats the exports from other countries with the same level of trade agreements (which in no-deal means none, aside the mitigants).
“The checks, restrictions and prohibitions suggest severe damage to UK exports. We would expect much of the damage to happen quickly. However, ultimately a no-deal scenario could not last for years as close neighbours inevitably reach some agreement on trade. On balance we would expect a nodeal Brexit to have an immediate and substantial impact on the UK economy, pushing the UK economy into a deep recession and the EU into a mild one.”
Mercers added that it is difficult for investors to fully prepare for the potential effects Brexit could cause given the fluidity of the situation. However, Mercers recommends investors review their investment portfolios in order to ensure their robustness to a potential no-deal Brexit fallout. Mercers also recommend clients evaluate their currency hedging profile in regard to overseas equities so that if markets were to significantly turn down, they could potentially evade the full effects.
“On balance we would expect a no-deal Brexit to have an immediate and substantial impact on the UK economy, pushing the UK economy into a deep recession and the EU into a mild one.”