December 5, 2019
By Jonathan Cable
LONDON (Reuters) – Britain will leave the European Union with a free trade deal, economists polled by Reuters predicted, attaching the joint lowest possibility of a disorderly Brexit since monthly polling began on it over two years ago.
Almost all foreign exchange strategists surveyed by Reuters were reasonably or very confident Britain would leave with a deal. As a group, they expect sterling <GBP=> to strengthen over the coming year.
Incumbent Prime Minister Boris Johnson looks set to win a majority at the Dec. 12 election he called to try and break an impasse in parliament. That should allow him to get his withdrawal agreement passed by lawmakers and take Britain out of the EU on Jan. 31.
“We continue to think the most likely outcome of the election is a small Conservative majority of under 60,” said Samuel Tombs at Pantheon Macroeconomics. “Investors might be relieved by that outcome initially, given that it would pave the way for the Withdrawal Agreement Bill to be ratified quickly.”
The median probability of a disorderly Brexit, when no deal is agreed between the two sides, dropped to 15% in the Nov. 29-Dec. 4 Reuters poll from 20% given last month. That was the lowest since a May poll taken soon after the EU granted another delay to Britain’s departure.
All 35 economists who responded to an extra question said London and Brussels would eventually agree a free trade deal. This has been the most likely scenario selected in Reuters polls since the 2016 referendum.
Flipping back in to second spot from third was the more extreme option of leaving without a deal and trading under World Trade Organization rules.
Falling to third most likely outcome was for Britain to remain a member of the European Economic Area, which would mean paying into the EU budget to retain access to the Single Market but having no say over policies.
Last place went to Brexit being canceled, as it has in nearly every Reuters poll.
As inflation is predicted to remain below the Bank of England’s 2.0% target until well into 2021, Bank Rate is expected to be left unchanged at 0.75% until at least 2022. Last month, a 25-basis-point increase was expected in 2021.
A rate hike would support to the currency. But with hopes rising that a disorderly Brexit will be avoided, sterling – which jumped to a seven-month high above $1.31 on Wednesday as investors bet on a Conservative majority – is expected to gain ground in the coming year anyway.
It will trade around $1.30 at the end of the year and at $1.33 in six months, the poll of nearly 60 foreign exchange strategists found. In a year, the pound will be 3% higher at $1.35, better than a prediction of $1.32 made a month ago.
Against the euro, the pound will go nowhere. One euro <EURGBP=> will be worth 85 pence in a month, six months and a year, where it was around on Wednesday. The euro zone, Britain’s biggest trading partner, is facing its own economic troubles.
The chance of a British recession within the next year held at a median 25%. The chance of one in the next two years was steady at 30%.
With uncertainty likely to continue curtailing consumer and business spending, the economy will grow a modest 1.0% next year and then pick up to 1.5% in 2021, the wider poll of over 70 economists showed.
But even if Johnson gets his agreement through parliament, Britain faces another cliff edge at the end of 2020 – the deadline to thrash out a trade deal with the EU.
“A no-deal Brexit at end-2020 is still in prospect if the Conservatives’ manifesto commitment is to be believed. However, I maintain that such an outcome will not be economically beneficial to the UK and a rational government will do everything it can to avoid it,” said Peter Dixon at Commerzbank.
“But in the event that Boris Johnson leads a majority Conservative government, the experience of the last three years suggests that such rationality may be in short supply.”
When asked what outcome of the UK election would be best for the economy next year, 30 of 38 economists said a Conservative majority rather than a Labor majority or a coalition government. But not all were convinced any outcome would be great.
“The ‘least bad’ outcome might be a better description than ‘best’,” Ross Walker at NatWest Markets said.
(Polling by Sarmista Sen, Richa Rebello, Sujith Pai and Nagamani Lingappa; editing by Larry King)