Global Daily – What comes after the Brexit vote

by: Bill Diviney , Arjen van Dijkhuizen

UK Politics: Another referendum the most likely route out of the impasse – Parliament is due to vote on Prime Minister May’s Brexit deal this evening (sometime between 20:00-22:00 CET). Despite May’s efforts to obtain assurances from EU leaders over the controversial backstop provision, opposition to the deal is as strong as ever. Twelve former cabinet ministers wrote a letter urging MPs of Theresa May’s own party to reject the deal, while the DUP – which props up May’s government – and the opposition Labour Party have confirmed that the assurances are not sufficient, and that they will vote against the deal. The question is on the extent of the defeat, rather than whether it happens.

The next steps involve a no confidence motion from opposition leader Jeremy Corbyn – perhaps as soon as this week – which will likely fail, and the Prime Minister presenting her ‘Plan B’, due by next Monday at the latest. Events could go in any number of directions thereafter. For instance, Bloomberg reported over the weekend that the Prime Minister is being urged to pursue a Plan B with the opposition Labour leader Jeremy Corbyn, perhaps involving a permanent customs union with the EU. However, such a move could lead to a potentially lasting split in the Conservative Party, given that significant numbers oppose the current deal because of fears over the likely permanence of the backstop (which also involves a EU-UK customs union).

Ultimately, we believe the most likely scenario is another referendum. There is clearly no majority in parliament for no-deal. Moreover, the renewed powers of backbench MPs to submit Plan B proposals provides a mechanism for no-deal to be taken off the table (one proposal, for instance, is to vote on revoking Article 50 if an alternative isn’t agreed before March). In any case, Brexit looks likely to be a softer one than Theresa May’s deal, and perhaps will not happen at all. (Bill Diviney)

China Macro: Weak foreign trade data add to slowdown fears – China’s export and import growth for December came in much weaker than expected. Merchandise exports (in USD values) contracted by 4.4% yoy (vs +5.4% in November and +2.0% consensus expectation). That was driven by weakening demand from main export partners (US, Hong Kong, Japan, EU), but also reflects payback for previous frontloading related to the US-China trade conflict. Meanwhile, imports contracted by 7.6% yoy (November: +3.0%, consensus: +4.5%). The weakening of import growth not only relates to the slowdown of the Chinese economy. It also reflects slower export growth (as a large chunk of imports from global manufacturing hub China is export related), the fading of frontloading practices and last but not least the downward turn in commodity prices in the course of last year. Imports from the US were particularly weak (-36% yoy), with China’s bilateral surplus with the US still on a rising trend. Looking ahead, we expect China’s economy to stabilise in the coming months, as we expect previous drags stemming from Beijing’s financial deleveraging campaign and the US trade and investment conflict to ease. Over the past months, the authorities have taken a wide range of fiscal and monetary easing measures to safeguard growth. Moreover, recent bilateral negotiations seem to indicate a somewhat higher probability of a short-term deal between the US and China, which would remove the risk of further import tariffs. All in all, it may take a while before the full effects of easing policies and more positive trade negotiations will be felt in full. Meanwhile, Chinese activity data, particularly foreign trade data, may prove volatile in Q1-2018, partly reflecting the shift in timing of the Chinese New Year (this year scheduled in early February) and the further effects of previous frontloading practices (Arjen van Dijkhuizen)