The expected conclusion to Brexit is weighing on eurozone
economic growth. The inability of the U.K. Parliament to
find an equitable agreement to leave the European Union
(EU) triggered the resignation of Prime Minister Theresa
May. We expect Boris Johnson to be the Conservative
Party’s choice to replace May.
Johnson favors a renegotiation of the original deal, but
supports a “hard” Brexit — where the U.K. leaves the EU
without an agreement to clarify trade and other issues — if
that’s not possible. With the EU holding firm that it will
not renegotiate the exit deal, Johnson’s ascension to prime
minister would increase the odds that the U.K. could leave
the EU on Oct. 31 without a deal.
Muted Eurozone GDP growth tied to global trade
Source: Ivy Investments analysis of CPB World Trade Monitor and Eurostat economic data. June 2019.
In our view, the U.K. will fall into recession if this occurs.
We hope that Parliament would step in before this occurred,
which could include a vote of no confidence that could
result in new general elections and a new government.
While a hard Brexit is not our base case, the risks of such an
event have clearly risen.
The outlook for the other side of the Brexit equation is
somewhat tame. The eurozone’s economy is tied to not
only China, but also the global trade cycle. The European
Central Bank (ECB) continues to push out its own forecast
for when it will be able to raise interest rates, with its
deposit rate currently at -0.4%. Recently, the ECB indicated
it stands ready to ease if needed. We increasingly believe
that the ECB will have difficulty getting the deposit rate
much above zero before the next recession and could still
have negative rates at that time.
Ivy Live: Ivy’s Midyear Outlook: Rates, risks and rallies
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