Today in Brexit, Day 1,168

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

Wednesday was a whirlwind day for the British Parliament and Prime Minister (PM) Boris Johnson. But, for all the activity, politicians really didn’t resolve anything noteworthy, and the only thing certain is that uncertainty remains off the charts.

First, following MPs’ successful motion to hand the day’s agenda to themselves, 20-plus rebels from Johnson’s Conservative Party joined with Labour, the pro-Europe Liberal Democrats and the Scottish National Party (SNP) to pass a bill sponsored by Labour MP Hilary Benn. Benn’s bill requires the government to request a Brexit delay if they haven’t secured a new deal with the EU by the end of October’s summit. Johnson first responded by booting the rebels (including former Chancellor of the Exchequer Philip Hammond) from the Conservative party. Then he followed through on earlier threats and tabled a motion to dissolve Parliament and hold a snap election on October 15. Labour leader Jeremy Corbyn, who up until about 15 minutes ago repeatedly agitated for a vote, told his MPs to abstain, guaranteeing the measure would fail as it would require an Aye from two-thirds of the House of Commons. But Corbyn’s stated reasoning—that he wanted to wait until Benn’s bill had passed the House of Lords and received royal assent, officially binding the government’s hands—suggests Johnson might try again for a snap election next week.

So here we are. Given the overwhelming Remain bias in the House of Lords, Benn’s bill seems like a foregone conclusion, likely taking no-deal Brexit off the table on Halloween (presuming EU leaders grant the delay). So whoever represents the UK at the mid-October EU summit won’t have a key bargaining chip or a tight deadline. It is anyone’s guess who that person will be. Johnson wants the vote to happen on October 15, two days before the summit begins. But the opposition parties might not want to hold an election until the EU has officially granted an extension. Should Johnson not get his wish for a vote on the 15^th, he could remain in power, go to the summit and try to somehow extract concessions from the EU. EU leaders could refuse a delay. Or the opposition could table a No Confidence vote in hopes of bringing down his government and installing a caretaker administration supported by Labour, the Lib Dems, the SNP and the Conservatives Johnson kicked out yesterday. In that case, a pro-EU Brit would likely rep the UK at the summit, throwing a big monkey wrench in the whole process.

On the pure Brexit front, businesses didn’t get needed clarity today. Taking a no-deal Brexit off the table temporarily probably makes those who fear no deal happy, but it doesn’t give businesses any information on when Brexit will happen or what it will look like. It doesn’t even guarantee a no-deal Brexit doesn’t eventually happen, perhaps in January. This is a problem for businesses, who have spent all summer working through inventory stockpiles they amassed in the spring, which turned out to be unnecessary. That hiccup caused UK factory activity to fall and hit German (and broader European) exports to the UK. So, now what? Do businesses build stockpiles again, knowing they might not be necessary? Commentary from the IHS Markit/CIPS manufacturing purchasing managers’ index for August suggests businesses started doing just that. Even if they have enough confidence that a deal gets done (or Brexit goes smoothly) in the next few months, they still don’t have enough information to launch long-term business plans. The more rounds of delay we get, the more businesses will have to keep thinking short-term, delaying big investment plans. That isn’t good for economic growth or long-term prosperity and productivity.

We don’t expect the fog to lift anytime soon. If there is no election, the status quo means endless stalemates. If there is an election, who knows. Johnson enjoys stronger popular support than Theresa May did, and polls favor the Conservatives. Should they win and gain relative clout, he would likely tout this as a de-facto second referendum supporting Brexit. But the polls may not prove telling. The Brexit Party’s rise adds another wrinkle and may cut into Conservative support if they don’t strike an alliance. Meanwhile, Labour and the Lib Dems will likely campaign on an outright second referendum, adding a big dose of constitutional uncertainty if they can win a combined majority. To say this looks likely to be a wild ride is an understatement.

So, our advice: Buckle up. Headlines will remain sensational, making it difficult to separate fact from fiction—witness how much they blew up Johnson’s decision to prorogue Parliament last week. You would think the ghost of Generalissimo Franco had taken over the country, not that a PM was cutting debate short by a week or so, which he argues afforded the best chance of upholding the results of a popular referendum that passed more than three years ago.^[i] We doubt it gets quieter or saner from here. The uncertainty probably dogs UK (and to a lesser extent EU) stocks for the foreseeable future. But when it finally lifts, whatever form that takes, it should bring relief.