Global Daily – Brexit delay and UK election likely

by: Bill Diviney , Aline Schuiling , Nick Kounis

UK Politics: ‘Indicative votes’ unlikely to resolve the impasse – Following the European Council decision last week to extend the Article 50 deadline, parliament will this evening vote on an amendment to allow so-called ‘indicative votes’ on alternatives to PM May’s Brexit deal. The amendment is likely to pass (albeit by a slim margin) given opposition and Conservative rebel support for it, which would pave the way for votes on various Brexit Plan B options on Wednesday. These would include, eg. customs union membership, European Economic Area membership, and a second referendum – i.e. scenarios that have already been rejected by MPs in previous rounds of amendment voting. Could the outcome be different this week? It is possible the proximity to a potential no deal/long Brexit delay, and the low likelihood of May’s deal passing a third time (another vote could still happen later this week), might now focus MPs’ minds. We doubt this, however, as MPs still seem wedded to their most preferred Brexit options, and look unwilling to compromise and coalesce around something specific just yet.

Regardless of whether any Plan B gets a majority, a long Brexit delay request to the European Council – which must happen by 12 April – and a new general election look to be the next major steps in the Brexit process. PM May confirmed in her statement to parliament today that even if a Plan B had a majority, she could not abide by something that went against manifesto commitments (which essentially binds her to her deal). We read this as a further strong hint that an election is looming, as this would provide the opportunity for fresh leadership to stand on a new Brexit manifesto, while also providing the justification to the European Council for a long Brexit delay request. What comes after such an election remains unclear, as it would depend enormously on the post-May leadership of the Conservative Party, and whether Labour would stand more clearly on a soft Brexit/second referendum platform. What has become clear is that Brexit looks unlikely to take place in the next two months, with a long delay now our base case scenario. (Bill Diviney)

Euro Macro: Ongoing economic weakness raises chances of QE-II – A number of key business surveys for March were published in the eurozone in recent days. To begin with, the flash PMIs came out last Friday. The composite PMI declined to 51.3 in March, down from 51.9 in February. The details of the report show that the services sector PMI was roughly unchanged (52.7 in March), whereas the manufacturing PMI moved down further, from 49.4 to 47.6, which is the lowest level in almost six years. The more forward looking new orders component of the manufacturing PMI plummeted from 46.3 to 44.9, illustrating that the recession in the eurozone manufacturing sector is deepening, reflecting the sharp slowdown in global trade.

The deepening recession in manufacturing was also underlined by a further drop in Germany’s Ifo business climate in industry, which fell from 97.8 in February to 96.7 in March, as both the component measuring the current condition as well as the component measuring expectations declined. Similar to the services sector PMI, the Ifo business climate in all sectors besides manufacturing were more resilient, and even rose somewhat in March. However, although domestic demand in the eurozone still is expanding, there are also signs that the domestic economy is being impacted, as capital spending is hurt by the slowdown in exports. Overall, the surveys are consistent with eurozone GDP growth of around 0.1-0.2% qoq. We expect these near stagnation levels of growth to continue in Q2, before a modest and gradual improvement in the second half. This trajectory for growth will not be sufficient for underlying inflationary pressures to build. We think that ECB forecasts for growth and inflation remain too high despite recent downgrades. Our base case is that ECB policy interest rates will remain on hold through to the end of 2020. However, the probability is rising that the ECB will need to step up stimulus and restart QE. (Aline Schuiling & Nick Kounis)