The UK ended February with the question of Brexit still unanswered. The month was dominated by political newsflow as concerns over Brexit were compounded by the resignation of eleven MPs who left the Conservative or Labour parties to form ‘The Independent Group’. A second ‘meaningful vote’ on Prime Minister Theresa May’s Brexit deal will take place on 12 March. If the Government is defeated, MPs will face a vote on whether they support a ‘no-deal’ Brexit; if this vote is rejected, the Government will take steps to move the 29 March Brexit deadline to the end of June at the latest. Nevertheless, the Prime Minister stressed: “An extension cannot take ‘no deal’ off the table. The only way to do that is to revoke Article 50, which I shall not do, or agree a deal”.
The possibility that Brexit might be delayed beyond its 29 March deadline drove sterling to its highest level against the euro for almost two years during February. Brexit-related uncertainties have intensified, according to the Bank of England (BoE), and the UK economy is set to grow by only 1.2% this year, compared with an earlier forecast of 1.7%. Bank of England (BoE) Governor Mark Carney warned: “The fog of Brexit is causing short-term volatility in the economic data, and more fundamentally, it is creating a series of tensions”. In particular he highlighted tensions for businesses, for households, and for financial markets. Nevertheless, he also emphasised: “Whatever form Brexit takes, the world will still turn”.
The UK economy grew by 1.4% in 2018 as a whole, posting its slowest annual rate of growth since 2012. Manufacturing output and car production fell. Over the final three months of 2018, the economy contracted at a quarterly rate of 0.4%. The economy had expanded by 1.8% in 2017.
‘businesses are being “hung out to dry”’
The Government released its evaluation of the implications of a no-deal Brexit on business and trade. The report said that there was “little evidence” that companies are “preparing in earnest” for no deal, and warned of the possibility of disruption to food supplies from the EU. Around 30% of the UK’s food comes from the EU and, under a no-deal scenario, some food prices are expected to rise and there is a risk that “consumer behaviour could exacerbate, or create, shortages”. Meanwhile, the British Chambers of Commerce (BCC) complained that businesses are being “hung out to dry” through a lack of “clear, actionable information from Government”. Elsewhere, the Association of British Insurers (ABI) warned that a no-deal Brexit would be “an unforgivable act of economic and social self-harm”.
Over February, the yield on the benchmark UK government bond edged higher, climbing from 1.24% to 1.25%. During the month, however, it fell as low as 1.15% as the BoE cut its forecast for the UK’s economic growth, making the possibility of higher interest rates appear even more remote. Meanwhile, the yield on the short-dated gilt – which matures in 2021 – rose from 0.79% to 0.85% over February.
Disruption caused by a no-deal Brexit could materially undermine the competitiveness and operational performance of some companies, according to S&P Global Ratings, and could lead to credit downgrades for some companies. Companies in the automotive, leisure, retail, real estate, aerospace & defence, and transport infrastructure sectors are likely to be particularly vulnerable, although ratings in the banking sector could be placed under pressure by a rise in insolvencies and, in the longer term, by a decline in asset quality and activity.
Brexit-related uncertainties led UK manufacturing companies to stockpile raw materials at the fastest rate for 27 years during January, according to IHS Market/CIPS. UK supply chains are moving “closer to breaking point”; growth in new orders is losing momentum, and jobs in the sector fell for only the second time since 2016. Elsewhere, the UK services sector languished in January, and new orders posted their first decline for two and a half years.