SocGen Now See An 80% Chance Of A No Deal Brexit Scenario

Societe Generale note that "the damage is done. Whether or not the planned legislation, the Internal Market Bill, is passed in a form that maintains this feature, the level of trust between the two sides has already been gravely damaged. With PM Johnson likely to continue his high-stakes negotiating strategy, we no longer think a deal can be struck before year-end. We now see an 80% probability of a No Deal. Preparations for a No Deal should now proceed in earnest. The UK economy is likely to be dealt another (avoidable) blow that it could well do without.

• The government has admitted that the proposed bill would permit the UK to break international law in a "specific and limited way". In his introduction to the bill in the UK parliament, Johnson tried to justify this as being necessary to prevent the EU being able to impose a "food blockade" on agricultural trade between Northern Ireland and mainland UK. This is disingenuous, to put it mildly. The EU trade proposals do no such thing. Moreover, the potential problem perceived by the UK only arises because Johnson tore up key parts of his predecessor's draft Withdrawal Agreement in a rush to be able to sign a Withdrawal Agreement without another extension. This is a problem of his own making.
• The formal deadline to extend the transition period was 30 June; any sort of fudge that might have been previously envisaged is now academic. The UK approach has become so confrontational that the most likely outcome is No Deal by the end of the year, with the UK then trading with the EU under WTO terms. A deal is still possible, but it would be very limited in scope.
• The Bank of England's own Brexit scenarios suggest a hit to GDP in a range of 2½-5½% to the end of 2024, depending on the degree of preparedness. Although the preparations look hasty and incomplete, they should mitigate the effect. Furthermore, some trade deals with non-EU countries will be struck (already done with Japan, for example), but a deal with the US will not be easy for as long as the US Congress maintains its unease about the impact of Johnson's approach on the Good Friday Agreement. We expect a hit of 3% of GDP over the next few years but of up to 5% in the short term. The BoE is likely to ease further early in 2021, in addition to the easing we already expect in November.
• In response, the ECB might consider temporarily boosting its purchases under the PEPP. On the fiscal front, the EU member states are likely to announce specific measures to shore up the sectors hit by Brexit (agriculture, fisheries, cars, customs, etc.), while the EU should at the least use the €5bn special Brexit Reserve Fund already set aside."