UK: Christmas cancelled?

Former foreign secretary Boris Johnson remains the odds-on favourite to become the next UK prime minister – and since the comment in an interview that the 31 October Brexit deadline is “do or die”, markets have become a little more nervous about the UK outlook.

But how likely is ‘no deal’ in reality? We took a closer look in last month’s update, but to recap, we still think the probability of a ‘no deal’ exit in October sits around 20%. Parliament remains heavily against it, and while lawmakers may lack the legislative tools to stop it, MPs could use a vote of no confidence to force a general election instead. For this to succeed, a majority of MPs in the House of Commons would need to back it.

We still think the probability of a ‘no deal’ exit in October sits around 20%

While it may sound like a tough sell for the Conservatives to effectively vote themselves out of government, it wouldn’t take many MPs to do so. If the Conservatives lose a by-election in Wales later this month, their working majority within the House of Commons would fall to just two.

In terms of timing though, it’s hard to see a no-confidence vote being successful unless a ‘no deal’ exit looks completely unavoidable. Therefore, if an election is to happen, it’s unlikely to be triggered until fairly late in the day. Taking into account the minimum timings to hold an election suggests the earliest it could realistically happen is just before Christmas.

In the meantime, all of this uncertainty is taking its toll on the economy. Second quarter growth looks set to come in flat, or possibly even negative. Much of this has to do with manufacturing, which saw production fall by a whopping 3.9% in April. Admittedly some of this is down to various car manufacturers bringing forward their annual re-tooling shutdown to the start of April. But the much bigger story is that new orders have slowed sharply following the stockpiling frenzy that took place ahead of the original March Brexit deadline.

Second quarter growth looks set to come in flat, or possibly even negative

These firms now face a tricky decision. Given the cost of holding this extra stock – both in terms of storage and working capital – many will choose to unwind some of this inventory and try and rebuild it ahead of the new October deadline.

However, this is awkward timing for many firms, given that Christmas-driven demand means warehousing space is already very constrained. According to the UK Warehousing Association, the inner-M25 (London) area has a vacancy rate of just 2.2%. For many retailers, the price of preparing for ‘no deal’ is being unprepared for the key Christmas trading period.