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UK CommentTheresa May is forced out – likelihood of a hard Brexit increases

  1. A Brexit hardliner will probably take over as PM, most likely Boris Johnson
  2. With a Brexit hardliner, the likelihood of a no-deal Brexit increases, in our view
  3. We adjust our pound forecast accordingly and expect a weaker pound ahead
A Brexit hardliner will probably take over as PM, most likely Boris Johnson
After intense pressure over the past weeks and days, Theresa May on Friday finally announced that she will resign as Prime Minister of the UK and leader of the Conservative Party. She will step down on Friday, June 7, following the US state visit, and remain in the role as caretaker until a new party leader has been chosen, probably late July. The next party leader will also automatically become the new Prime Minister of the UK. Around 15 candidates are expected to take part in the leadership race, and many of the more prominent candidates are outspoken Brexit hardliners. Boris Johnson is currently the frontrunner, but a “Stop Boris” campaign was launched at the weekend to try to weaken his case. However, despite his past mistakes and somewhat unpolished behaviour, Johnson is the charismatic leader who many believe would have the best chances of beating Jeremy Corbyn and the Labour Party in a general election. Johnson also seems to appeal to the grass-root Tory voters, and could probably win back many voters from Nigel Farage’s Brexit Party, which has seen a surge in popularity ahead of the EU elections. With Boris Johnson, the UK would get a PM that has campaigned for Brexit, who believes a no-deal Brexit should be an option and who said before the weekend that the UK would leave the EU on October 31, deal or no deal.
With a Brexit hardliner, the likelihood of a no-deal Brexit increases, in our view
However, even if Johnson or another Brexit hardliner were to become PM, the arithmetic of the UK parliament is still the same, and so far the MPs have been unable to agree on a way forward for Brexit. The EU stance is also unchanged, implying that there seems to be no willingness in the EU to renegotiate the Brexit deal. The new UK PM would probably try to go to Brussels to get some concessions, but we believe this will be futile. A cross-party Brexit compromise, including a customs union, is most likely not an option any longer since the cross-party talks collapsed with Theresa May in charge. With Boris Johnson as PM, such talks would probably never be revived. What then? What about a no-deal Brexit? Well, so far there has been a majority against it in parliament. However, there seems to be a growing number of people in the UK fed up with waiting for Brexit. This has become clear as voters have flocked to Nigel Farage’s Brexit Party, which received many as 33% of the UK votes in the EU elections. Also many Tory MPs seem very keen on getting Brexit over and done with. This kind of sentiment could possibly make more MPs want to go for a no-deal. And given his past record, Boris Johnson would probably encourage this direction as PM. However, if no Brexit alternative can gain a majority in parliament, a second referendum or a general election could be required to get some direction from the people. None of these alternatives have been very popular so far either, but perhaps at the brink they could seem more appealing to many MPs than a no-deal Brexit. However, both these options would require that the EU agrees to a new extension. The EU has warned that it might not grant one, but we believe the EU would not want to be stuck with the blame of having pushed the UK off the cliff.
We adjust our pound forecast accordingly and expect a weaker pound ahead
For now, we prefer to keep our baseline expectation for a general election or a new Brexit referendum, implying a new postponement to the Brexit date. However, given that we believe the UK soon will be led by a Brexit hardliner, and most likely Boris Johnson, we believe the likelihood of a no-deal Brexit has increased notably. We therefore adjust our forecast and expect a weaker pound ahead. Currently, we see the EUR/GBP at 0.88 by the end of Q3 and at 0.89 at the end of Q4.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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