Will May Get Her Deal Passed The Second Time? Markets Think So

(Bloomberg) -- The British Parliament will probably reject Prime Minister Theresa May’s Brexit deal, but then approve it on a second attempt amid market pressure, according to UBS Wealth Management’s chief economist Paul Donovan. He reckons that prediction is now the consensus view in financial markets.

Here’s a rundown of how things are likely to unfold over the coming weeks, according to UBS’s house view, which Donovan set out in an interview in Brussels.

The Steps:

  • Tory dissenters and opposition parties, including Labour lawmakers, reject the deal, as the ambitious wording in the political declaration on the future ties is “not going to significantly change the prospects” of it getting through Parliament
  • After it’s rejected, a vote of no confidence against the government “will almost certainly” be triggered, but is likely to fail, “as nobody wants no government with two weeks to go before Christmas and three months before a hard Brexit.”
  • Donovan expects Tories to rally around May after the vote.
  • Market volatility ensues, increasing pressure for a compromise
  • The EU is likely to offer a token gesture, some sort of cosmetic, minor tweaks to the wording, and a second vote on the improved offer will follow, in January. (The EU has made clear it won’t renegotiate.)
  • Labour will still probably oppose the new offer, but several Labour MPs will defy the party whip and support the agreement
  • “The issue here is that a lot of members of the Labour party want a deal. But they need to show that they tried to bring down the government. They need to be able to go back to their constituencies and local party members and say ‘look, we tried and it didn’t work’. Then, in the national interest,’ we had to support the deal.”

Risks and Outlook

  • For Donovan, because that sequence of events is now the consensus expectation in financial markets, the reaction to the first negative vote in the House of Commons may not be as severe, thus not raising enough pressure on MPs to support the deal in the second vote
  • “Market volatility would remind members of Parliament that there are consequences” of a no-deal scenario. Still, even without it, most lawmakers understand that a hard Brexit would hurt the U.K. economy
  • If the agreement is eventually approved, the British economy will strengthen in the short-term, as investment, which has been delayed due to uncertainty, will pick up.
  • “On a 10-year view, the trend of growth will be lower,” Donovan says, as the country’s withdrawal from the bloc “adds friction and makes the economy a little less efficient.”

©2018 Bloomberg L.P.