Boris Johnson promised the day after his ascension to prime minister that he could negotiate a better deal for Britain’s departure from the European Union than his predecessor.
But the ardent Brexit advocate also reminded the country’s 66 million citizens that they must prepare for the possibility of leaving without one, a possibility made more likely by the trading bloc’s insistence that the agreement that ultimately cost Theresa May her job is the best it’s prepared to offer.
It’s a contingency Johnson himself says he doesn’t want, one that the European Union warns will damage both Great Britain and its allies economically and yet another looming risk that might bolster the case for the Federal Reserve to lower interest rates in the U.S. later this month. Even if Johnson staves off a worst-case scenario, the turmoil preceding a resolution is enough in itself to weigh on financial markets and curb business investment.
“To all those who continue to prophesy disaster, I say, ‘Yes, there will be difficulties,'” Johnson said in a speech at No. 10 Downing St., the prime minister’s residence, on Wednesday. “I believe that with energy and application, they will be far less serious than some have claimed. But if there is one thing that has really sapped the confidence of business over the last three years, it is not the decisions we have taken, it is our refusal to take decisions.”
In the U.S., Fed Chairman Jerome Powell has cited the risk of a disorderly breakup between Britain and the European Union in congressional testimony earlier this month as one of the looming challenges for American growth, already weakened by slowing global expansion and fallout from President Trump’s trade disputes with China. The U.S. central bank has indicated that its next change to interest rates, which have been raised nine times in the past three years, to a range of 2.25% to 2.5%, is likely to be a reduction.
“Uncertainties about the outlook have increased in recent months,” Powell told the House Financial Services Committee on July 10. “In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy.”
Trading in interest rate futures tracked by CME Group currently indicates a 25% chance the Fed will cut rates 50 basis points on July 31 and 75% odds it will lower them at least 25 basis points, a potential boon for corporate borrowers as well as consumers with adjustable-rate credit cards.
That would give a victory to Trump, who has long pushed the Fed to lower rates, in part to ease the impact of higher prices from tariffs the White House imposed on $250 billion of Chinese imports. The president, who says Johnson has been described as Britain’s Trump, praised his promotion to prime minister and said he looks forward to working with his government.
Johnson “will get it done,” Trump said Tuesday at Turning Point USA’s teen summit in Washington. “Boris is good. He’s going to do a good job.”
The new prime minister may get a less enthusiastic reception in Brussels, where European leaders remain committed to the Brexit deal struck with former Prime Minister Theresa May, who resigned after she was unable to win Parliament’s backing for it.
“We reached a deal that, in my view, is the best possible deal,” Frans Timmerman, the first vice president under outgoing European Commission President Jean-Claude Juncker, said earlier this week. “I hope that is something that is understood in Westminster,” home of the British parliament. “This is the way we should move forward.”
Juncker’s successor, Ursula von der Leyen, who takes office Nov. 1, was as adamant: The existing agreement “is the best and only deal possible for an orderly withdrawal,” she said in a report outlining her vision for the trading bloc. In a speech to the European Parliament, though, she held open the possibility of a further extension to Britain’s departure date and emphasized that “the United Kingdom will remain our ally, our partner and our friend.”
What global investors think of Britain’s prospects on its own is evidenced in the decline of its currency. The pound is worth 15% less today than its $1.47 valuation before the June 23, 2016, vote that rattled both the existing European order and global markets, causing volatility to surge. Business investment fell through most of 2018, and the housing market has been subdued, the Bank of England said in a February report.
“As the experience of Brexit has shown, the indirect effects of trade tensions on business confidence and investment can be much more material than the direct effects alone,” Bank of England Governor Mark Carney said in a July speech. “U.K. business investment has flat-lined since the referendum, underperforming both previous recoveries and the international experience.”
In late spring, with global investors raising the odds of a no-deal Brexit to 33%, British stocks and the nation’s currency slid accordingly, Carney added.
“Whatever becomes of the current Brexit deal, the tail risks around the status quo are likely to intensify,” said Adrian Paul, an analyst with the New York investment bank Goldman Sachs, which sees a 45% chance of Britain leaving the EU with a trade deal in place and only a 30% chance of the country opting to remain. “It will be difficult to discern, in real time, if and when Prime Minister Johnson has switched from seeking a ‘better deal’ to actively pursuing ‘no deal.'”
