Today in Brexit, Day 2,651

Editors’ Note: MarketMinder prefers no politician nor any political party. We assess developments for their potential economic and market impact only.

Once upon a time, in some circles, people called the EU the Hotel California—you can check out any time you like, but you can never leave. Friends, they were wrong: Brexit, apparently, is the real entity one can never escape. The UK left the EU officially nearly four years ago, and the two sides sealed a new deal on Northern Ireland’s trade status half a year ago, but evidently, it still isn’t over. In recent weeks, UK Labour Party leader Keir Starmer has been jawboning about renegotiating a “better deal” that moves the UK into closer alignment with the EU if his party wins the next election (due by January 2025). Some business leaders are cheering. Yet we are left wondering why. Yes, yes, we know easier trade with Europe. But love or loathe the EU, reopening the Brexit bag introduces a fresh round of uncertainty, and it isn’t hard to imagine this occasionally weighing on UK stocks as the election slowly approaches. We doubt it is a massive headwind, and we don’t see that uncertainty as overly high now given how distant a possibility such a move is. But it is worth being aware of the context.

From the start, we have been agnostic on the topic of Brexit. We see the arguments for and against, and we think both sides have exaggerated their descriptions of the plusses and minuses. As it stands currently, the Brexited UK is not:

• An isolated (metaphorical) island that doesn’t trade and engage with the rest of the world and whose businesses can’t keep transacting in Europe.
• A perma-recessionary basket case.
• A red-tape shredding, efficient, free-market bastion devoid of byzantine EU regulations and groupthink.

Instead, the Brexited UK is an independent country that enjoys robust access to EU markets while being free to sign new trade deals elsewhere—and that hasn’t managed to fulfill the promises of Brexit by repealing the EU rules many Brexiters argued were counterproductive. It isn’t quite Brexit in name only, but it sure looks an awful lot like the pre-Brexit status quo, right down to the tepid economic growth rates. Not as bad as some feared, not as good as others hoped, just sort of there—keeping calm and carrying on.

But there is one thing Brits would have if politicians in both parties didn’t keep using Brexit to energize voters and get headlines: Certainty that the rules in place today are the same rules that will apply years from now. This knowledge, rather than the rules themselves, is what enables businesses to plan and invest, because it enables them to map out the eventual return and determine whether money spent now on something that will pay off years down the line will be worthwhile. In this regard, it matter less whether the rules—be they tariffs, regulations, trade restrictions or what have you—are what they would consider optimal. Perfect doesn’t really exist, and every rule has shortcomings that require clever navigation. But if businesses have confidence that the shortcomings today will be the same shortcomings a few years from now, they can set a gameplan and crack on. If they don’t have that confidence, if things look like they are in flux, that is a hefty incentive to wait and see. We can’t prove it, but we suspect that years and years of wait-and-see surrounding Brexit and associated details are one reason UK business investment has been so sluggish.

Alas, it doesn’t seem like UK businesses and investors will get this clarity any time soon. Starmer’s jawboning seems to have won support in certain corners, and with support comes campaign funding, so it seems reasonable to expect more of it. With Labour currently ahead in the polls, many see a Starmer premiership and new EU deal talks as a foregone conclusion. But polling this far ahead of an election is of little use, and a Labour victory (or coalition with the pro-EU Liberal Democrats) is far from a done deal.

Of course, Prime Minister Rishi Sunak and the Conservatives remaining in power doesn’t guarantee Britain checks out of Hotel Brexit. The intraparty debate over whether and how to scrap EU-era regulations continues, and it wouldn’t shock us if it got ever-louder as the election approached. Even if it comes to nothing legislatively, there is the tiny matter of the Brexit deal’s quintennial check-in clause, with the first check due in 2025. Sunak has pledged not to use this as an opportunity to reopen the deal, but again, electoral politics may have something to say about this. So might the EU.

How this all pans out is impossible to know now. We don’t think it is even possible to assign probabilities to all the various potential outcomes at the moment. The election is very much up in the air, as are all the policies and paths that could branch out from it. It is all a bit of an uncertainty fog. Too small today to be the sort of fog that justifies avoiding UK stocks, in our view, but the sort that might create sentiment headwinds now and then if the chatter gets crazy for a spell. We reckon it is a lot like the eurozone’s constant deliberating over common fiscal policy: part of the structural backdrop that occasionally comes to the fore, then fizzles into boredom.

Yet there are also a couple of silver linings. One, as the election and each party’s position come better into focus, investors will gradually get more clarity, which will enable more planning and risk-taking. Two, the talk in the meantime will enable markets to gradually price the potential outcomes and their various probabilities of coming to fruition, sapping the endgame’s surprise power. If the rules look set to change, businesses will probably know well in advance. And if they don’t, businesses will benefit from familiarity with the status quo. Either way, the risk of some massive, sudden regulatory shock seems low.