A steady stream of the most powerful people in Britain have been turning up the dial on warning the markets that the risk of a no-deal Brexit, also known as a hard Brexit, is increasing. However, a number of bank strategists and economists believe that the final outcome of a hard Brexit is unlikely.
This week Britain’s foreign secretary Jeremy Hunt said the nation should prepare for a no-deal Brexit. This comment came hot off the heels over the Bank of England governor Mark Carney and international trade secretary Liam Fox both separately saying that a no-deal Brexit is increasingly likely. Meanwhile a senior British regulator and the European Union warned banks and insurers about the same. Prime minister Theresa May’s government is also going to roll out no-deal Brexit advice.
However, Deutsche Bank strategists Panos Giannopoulos and Sukanto Chanda said in a recent note that “whilst hard Brexit is not our (or our economists) call, and in fact we do not think that the news flow has been significant to raise the probability of hard Brexit, we nonetheless acknowledge that the noisy path to a deal will likely lead to bouts of increased speculation.”
They highlighted that despite all the “political noise” around a no-deal Brexit has increased speculation that this will happen, they say “it is not clear to us whether the probability of hard Brexit has actually gone up.” They also added that while everyone has focused on Carney’s comments that the risk of a no-deal Brexit is “uncomfortably high,” it was taken “slightly ‘out of context'” because he also said in the same interview that the prospect the UK leaving the EU without a deal was “a relatively unlikely possibility, but it is a possibility.”
“Essentially, Carney implied that any probability of hard Brexit above zero is uncomfortably high given the significant negative implications it entails … Our view has been that of a soft Brexit but with a volatile path leading into it,” they said.
Meanwhile, Sonali Punhani, director of economics at Credit Suisse echoed the Deutsche Bank strategists’ thoughts.
“Our central scenario remains that a soft Brexit is more likely than the UK crashing out without a deal, though the risk of the latter has gone up. In our view the parliament will likely rule out a no deal Brexit,” she said.
“But it seems increasingly likely that the path by which we get a soft Brexit has to involve considerable UK domestic political stress. This could involve parliament rejecting the final deal which in turn could lead to a general election, second referendum or leadership change.”