Brexit: Uncertainty did imply an opportunity cost and will continue to do so - BNP Paribas

William De Vijlder,  Group Chief Economist of BNP Paribas, point out that the economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.

Key Quotes: 

“Judging by the equity market reaction the day after the debate in parliament on Brexit, during which prime minister Theresa May suffered a historically large defeat, it seems investors are of the view that the likelihood of ending up where one does not want to be, that is a no-deal hard (i.e. without a transition period) Brexit, has receded. This reading is based on the underperformance of the more internationally oriented FTSE100 versus the more domestically focused FTSE250 index. It suggests that markets are a bit less concerned about the hit to the economy in case of a no-deal departure from the EU.”

“A no-deal Brexit can be considered as a tail risk and market reaction suggests that tail risk fears have abated. Whether this is more than just temporary relief will depend on how the discussions in the UK and between the UK and the EU evolve. The huge majority against the deal which had been negotiated implies that profound changes are needed to get parliamentary support keeping in mind that the European partners need to agree as well. At the risk of oversimplifying, it’s like trying to square a circle: taking enough distance from the EU so as to be able to negotiate its own trade agreements whilst avoiding a hard border between Ireland and Northern Ireland. 

“Given the challenge, delaying the Brexit date of 29 March seems quite likely now. Giving the negotiators more time provides hope that the tail risk can be avoided but it does imply that the economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon. The observation that, all in all, the UK economy has held up well since the referendum should not make us forget that uncertainty since then did imply an opportunity cost and will continue to do so.”