Today in Brexit, Day 1,160

Editors’ Note: We favor no political party or politician in any country and assess political developments solely for their potential market or economic impact.

Ladies and gents, the plot thickens. If you take the headlines at face value, after “Remainer” UK Members of Parliament (MPs) united yesterday in agreement to pursue legislation blocking a no-deal Brexit on Halloween, Prime Minister (PM) Boris Johnson retaliated today by asking the Queen to “prorogue” or suspend Parliament from September 12 to October 14. Remainers, opposition MPs and Commons Speaker John Bercow are railing against this apparent five-week shutdown, alternately calling it a constitutional crisis and assault on democracy. All are entitled to their opinions, and as ever, we are agnostic toward the politics—stocks don’t do sociology, and neither do we. However, we think it is important to separate fact from political talking points, and the fact is this suspension amounts to roughly one week of extra time off for lawmakers. In our view, it doesn’t radically change anything, including the likelihood of a no-deal Brexit on Halloween. Uncertainty still hangs over the UK economy and markets, and we remain of the opinion that the sooner this saga ends, regardless of how it ends, the better off UK (and European) stocks will be.

To understand why this autumn vacation isn’t as big a deal as some make it out to be, consider Parliament’s original schedule. MPs are presently on summer break and set to return to work September 3. However, Parliament always breaks for a few weeks in September and October while the political parties hold their annual conferences—think an annual version of the Republican and Democratic conventions. The annual conference season recess usually lasts three weeks or so, with Parliament returning around one week into October. So under this counterfactual, Parliament would have returned one week earlier than the schedule Johnson laid out today, giving lawmakers one week more to pontificate about Brexit. However, Remainers were jawboning about trying to cancel the autumn recess, keeping Parliament in session the whole time and giving themselves extra time to coalesce against Brexit and secure another delay. Losing this opportunity seems to be what that faction is most upset about, hence all the handwringing about losing five weeks.

Not to take sides, but we also think it is important to bear in mind that this sort of suspension isn’t unusual when there is a change in government that doesn’t involve a general election. The current Parliament has been in session since summer 2017, a long time by historical standards. Johnson was still operating under his predecessor, Theresa May’s, program. It is rather normal for a new PM to choose to buy themselves time to write their own agenda and kick off a new session of Parliament with a new Queen’s speech. This session was already set to end this autumn. So far, so normal. Nothing here reeks of the sort of unprecedented political shenanigans that should make investors fear for the long-term political stability of one of the world’s oldest democracies.

As for what happens next with Brexit, well, who can say. One school of thought says Johnson’s gambit all but guarantees Brexit happens one way or the other on Halloween. Even if MPs passed a no-confidence vote against his administration after they return to work in October, Johnson would remain PM until a new election was scheduled. Since he holds the power to schedule that election, he could continue sitting in 10 Downing Street as a caretaker, Gordon Brown style, until conveniently scheduling the election on, say, November 1. Of course, that presumes all the Remainers don’t unite in their oft-discussed Government of National Unity, which sounds noble but is probably easier said than done considering it would have to unite Labour, the Liberal Democrats, the Scottish National Party and probably some rebel Conservatives. Even picking a leader, never mind an agenda that extends beyond Brexit, could take weeks. Never say never, but we would consider this a rather low-probability outcome. MPs could also try to ram a Brexit delay through Parliament without bringing down Johnson’s government, but that also seems easier said than done given voters’ overall fatigue with the drawn-out process. Even some leaders of the Remain campaign are now urging lawmakers to just get on with Brexit.

Even presuming Johnson remains in office, the outcome remains unclear. A no-deal Brexit remains possible. So does securing a new deal, after his seemingly productive meetings with German Chancellor Angela Merkel and French President Emmanuel Macron last week, in which both leaders quietly erased some red lines and agreed to renegotiate key items like the Irish backstop. How those negotiations go from here is also unknowable. So, too, is how the other 25 EU nations will feel about any revised deal. Would UK MPs be more apt to pass a revised deal than May’s deal? Who knows! Parliament hasn’t been able to muster a workable majority behind any potential outcome.

Therefore, uncertainty probably goes down to the wire, potentially with economic consequences. Businesses may repeat their early 2019 strategy, stockpiling goods and components to get them through the immediate aftermath of a no-deal Brexit, while politicians are figuring out things like tariffs and customs checks. That could boost GDP (and EU exports) in late Q3 and early Q4. If Brexit happens on schedule, then that stockpiling won’t be in vain. If it is delayed again, however, it could once again leave businesses with an inventory glut to work through, reducing activity in the next couple months. That happened this spring and is a key reason UK (and German) GDP contracted in Q2, in our view. This time, however, the impact might not be quite as bad, as automakers already brought forward their annual maintenance shutdowns to coincide with the original Brexit date’s aftermath. The likelihood they shut plants for weeks at a time twice in one year seems low.

Because a delay would bring disruption, we think it is a less beneficial outcome for the UK economy and markets than just getting on with Brexit. Markets move most on surprises, and the likelihood Brexit goes worse than feared, at this point, seems close to zero. Stocks have spent years digesting all manner of no-deal Brexit fears, to the extent that anything short of Armageddon probably beats expectations. We think a no-deal Brexit with just a few disruptions would be a relatively better outcome than headlines have hyped. It may bring short-term volatility in the immediate aftermath, but as time passes and sentiment evens out, we suspect stocks would get over it and rally in relief when disaster doesn’t strike.