Brexit Update: The Rise of Boris Johnson’s Brexit

Given Boris Johnson’s strong majority in the current parliament, it is highly unlikely the edge-of-seat moments regarding Brexit voting in 2019 will be repeated in 2020.

This update contains three different sections which can be treated as a pick ‘n’ mix depending on your interests:

  1. Westminster: An update on what is going on in Parliament and the decisions being made on how the Brexit process will progress;
  2. Asset Management: Any updates in the period from regulators, government bodies, etc, that have a direct impact on the asset-management industry – including GBP/USD movements;
  3. Beyond Westminster: Any updates in the period from wider business groups and the like on the impact of Brexit, including companies that have announced movement of operations and/or job losses in the UK.

Brexit Countdown: 24 days to go (probably definitely this time)

The quote of the moment comes from UK Prime Minister Boris Johnson1, in his New Year’s message talking about progressing with Brexit in the New Year. (He may not have been trusted with cooking Christmas dinner given his apparent confusion between an oven and a microwave):

 

"That oven-ready deal I talked about so much during the election campaign has already had its plastic covering pierced and been placed in the microwave."

– Boris Johnson, UK Prime Minister

 

 

Westminster:

What Happened Recently?

In the December 2019 UK election, the Conservatives won 365 out of 650 seats, with 43.6% of the vote share. This gives them an eminently workable majority of 80 and, as such, full control of the Brexit process. The increase in Conservative seats (of 47) comes mostly at the expense of Labour, which had its worst election result since 1935, winning just 203 seats – 59 seats less than in 2017. The leader of the Labour party, Jeremy Corbyn, has said he will not lead the Labour party into the next election. He will, however, remain as leader until a leadership election takes place in 2020. The leader of the Liberal Democrats also lost her seat, leaving Johnson the last man standing out of the three main parties.

Johnson didn’t make any major changes to his cabinet post the election, promising a more radical shake-up in early 2020. In fact, there was so little change that two Members of Parliament (‘MPs’) who lost their seat or hadn’t run for election were swiftly made Lords in order to be able to remain in government positions. Johnson and his team, as has been the case before, appear not to notice the irony of having unelected members of the government when one of the core benefits they promote from Brexit is taking back control from “unelected bureaucrats”.

Johnson pushed forward with putting the Withdrawal Bill in front of the UK parliament. Just over a week after election day, the new cohort of MPs were presented with Johnson’s revised Bill. The Bill contained some changes from the one passed by parliament prior to the election (see below). At the time, Johnson needed to keep both the MPs opposed to a no-deal scenario and the Labour party on side; this is no longer the case. The Bill went through its First Reading (presentation of the Bill with no debate) and passed its Second Reading (where the main principles of the Bill are debated) on 20 December, 2019, with a majority of 124 votes. This paves the way for the Bill to be passed before the Brexit deadline of 31 January, 2020, once the MPs return to work on 7 January, 2020. The Bill still has to pass further debate and MPs have the chance to add amendments.

The major changes to the Withdrawal Bill from the Bill approved by Parliament prior to the election are as follows:

  • Removed from the Bill:
    • A clause giving MPs a right of veto over agreeing to an extension to the transition period;
    • A clause allowing a parliamentary approval process for the new treaty agreed with the EU;
    • Protection for workers’ rights that currently form part of EU law.
  • Added to the Bill:
    • A prohibition on any UK minister agreeing an extension or implementation period with the EU past December 2020;
    • Removal of the government’s existing obligations with regards to unaccompanied children seeking asylum in the EU who have family members in the UK.

In terms of Brexit, the most important of these is the addition of the prohibition on asking for an extension. This effectively gives an 11-month deadline to agree a trade deal with the EU – something that experienced trade negotiators do not believe to be possible. This action has ended some post-election media speculation that Johnson may move towards a softer Brexit, with standards aligned to the EU now that he was no longer beholden to the European Research Group (‘ERG’) element of the party. However, the new version of the Withdrawal Agreement Bill has made this much more unlikely and has left the door wide open for another cliff-edge moment at the end of 2020.

What Happens Next?

The next major stage in the process is the passage of the Bill through both Houses of Parliament. Labour and the Liberal Democrats will both table amendments to this Bill, pushing the government to seek an extension if there is no trade deal agreed by mid-June and a public inquiry into Brexit, respectively. However, given Johnson’s strong (and seemingly loyal) majority in the current parliament, opposition amendments have now been relegated to pretty much meaningless. It is highly unlikely the edge-of-seat moments from amendment voting in 2019 will be repeated in 2020. In our opinion, the deal will pass and the UK will leave the EU on 31 January, 2020.

In order to present Brexit as “done”, there have been reports in multiple media outlets that Johnson and his team will prohibit the use of the word Brexit after 31 January, 2020, including disbanding the Department for Exiting the EU. In reality, though, this is just the end of the beginning and the crucial work on negotiating the future relationship between the EU and the UK will begin.

European Commission president Ursula von der Leyen has said she has “serious concerns” about the deadline of December 2020 set by Johnson to negotiate a trade deal. In a meeting scheduled for 8 January, Johnson is expected to stick to his guns and urge the EU to move forward with the process as quickly as possible. Most trade experts agree that the only deal that could be negotiated in this time-frame would be for goods only and would heavily favour the EU. In the event of a lighter trade deal being agreed, there are options open – such as the EU granting temporary permissions to the UK in areas such as air and road transport – to allow things to continue as they are for a period.

Where Johnson is caught is choosing between the EU and the US. For a strong trade agreement with the EU, closer alignment of regulations is required; however, for a strong trade agreement with the US, the UK would need to be free to diverge from EU regulations in order to accede to some of the US demands in areas such as pharmaceuticals and agriculture where EU standards are higher than those in the US.

  • 2020 Brexit Timetable:
    • 31 January, 2020 – The UK will exit from the EU after 47 years of membership;
    • 1 March, 2020 – The EU is aiming to have its negotiating mandate agreed and signed off by the EU27. This gives the European Commission the legal authorisation to open talks with the UK;
    • June 2020 – A summit will take place in June so that the UK and the EU27 can assess the progress of the talks. This will also be the final month that the UK can request to extend the transition period beyond the end of 2020;
    • 26 November, 2020 – EU offices put this as the deadline for a trade deal to be negotiated, checked, translated and presented to the European Parliament in order to be ratified by the end of the year;
    • 31 December, 2020 – End of the transition period (if not extended). If a trade deal is not in place at this point, the UK will fall back to basic World Trade Organisation terms, with impacts on tariffs and border controls. This would essentially be the same impact as a no-deal Brexit.

 

Asset Management and Markets

The key risk to the asset-management industry as a whole remains the same as the risk associated with a no-deal Brexit. If there is no extension, realistically, the only trade deal that will be in place will be a thin one that doesn’t cover services. This could be an issue for the asset-management industry, which may face another cliff edge at the end of 2020. In the industry, by and large most decisions have already been made. Firms concerned about the implications of marketing into Europe shifted part of their operations prior to the first Brexit deadline in March 2019. The City now has to wait to see what sort of deal (if any) is agreed with relation to the services industry and perhaps, more importantly, whether regulations will stay sufficiently aligned enough with the EU for equivalency to be granted.

Whether the UK population as a whole is happy with the election results or not, the British pound initially appeared to welcome the certainty that this result brings. Brexit will definitely happen now and it seems that a decision made either way is better than no decision at all. Sterling and UK stock prices rallied on the results. However, analysts appear split on whether this will continue; JPMorgan is at odds with other analysts, believing the pent-up demand of investors waiting for there to be certainty does not exist to an extent that will sustain the rally. The hope that a softer Brexit may follow – with Johnson no longer being beholden to the ERG – faded with the amended Withdrawal Bill and sterling fell. It has bounced back somewhat (although not to the post-election highs) and is currently trading higher than it has for some time.

Figure 1 and 2 show movements in sterling against the dollar recently and over time:

Figure 1. The Movements of GBP/USD in Recent Weeks

The Movements of GBP/USD in Recent Weeks

Source: Bloomberg; as of 6 January 2020

Figure 2. The Movements of GBP/USD Since 31 May, 2019

The Movements of GBP/USD Since 31 May, 2019

Source: Bloomberg; as of 6 January 2020

 

Beyond Westminster:

Confidence in business investment seems to have returned – with the advent of political stability at least – given the size of Johnson’s majority and the threat of Corbyn’s nationalisation manifesto having been averted. Caution still continues with regards to Brexit, with the shape of any future Brexit deal as yet unknown – a particular concern for industries with complicated supply chains. Confidence may have increased; however, the BBC still forecasts that overall business investment fell by 1% in 2019 and will fall by 0.7% in 2020.2

 

1. https://www.theguardian.com/politics/2019/dec/31/lets-be-friends-boris-johnson-new-year-message-remainers
2. https://www.ft.com/content/622f00b8-2351-11ea-b8a1-584213ee7b2b?segmentId=114a04fe-353d-37db-f705-204c9a0a157b