Goldman Sachs believes that a Brexit deal can be clinched between the EU and the UK, after growing concerns that the UK would “crash out” with no deal in place—something also referred to as a “disorderly Brexit”.
Goldman believes that UK Prime Minister Theresa May will be able to rally together enough lawmakers, despite her wafer thin majority in parliament, to vote for a deal.
“Our own base case is for an orderly withdrawal, although the tail risks have admittedly increased,” Goldman said in a research notes for clients, reported Reuters. “We see the UK and EU settling on a free trade deal covering goods but excluding most services.”
Predictions of a “no deal” Brexit have increased over the last month or so, with EU negotiators appearing to turn their noses up at May’s proposal which includes a flagship special custom’s arrangement.
Playing that negotiating card had cost May huge political capital—including the resignation of her foreign minister—as she rallied the support of a cabinet riven by very different visions of Brexit.
Critics said her proposal, broadly seen as a “soft Brexit” gave too much control to the EU describing it as “Brexit in name only”.
Polls suggest her Brexit blueprint is highly unpopular with the public. But with increasing fears over the prospect of the “no deal” scenario, Goldman thinks May will probably be able to get a negotiated deal through the British parliament in December.
“While there may be no clear majority in parliament for any specific Brexit proposal, there is a majority to avoid the no deal outcome,” it said.
If no deal can be struck between the UK and the EU, then the UK will default to World Trade Organization rules on trade.
A Rise in the Pound
A “no deal” prospect alone has many concerned—although hardline Brexit supporters say it is the only way to ensure complete freedom from the EU.
Another concern is that with just eight months left before the UK finally cuts treaty ties with the EU, a no deal scenario will create a sudden gap in regulations, customs and business arrangements.
The UK International Development Secretary Liam Fox recently put the chance of a “no deal” outcome at 60:40, prompting the pound to fall to its lowest for 11 months.
But Goldman forecast the pound would rise to $1.36 in a year with the euro at 0.92 pence in a year. Sterling is currently trading at $1.27, and at 89.9 pence per euro.
Both opponents and supporters of Brexit agree that the divorce is Britain’s most significant geopolitical move since World War Two, though they cast vastly different futures for the $2.9 trillion UK economy and the world’s biggest trading bloc.
If May does not get the deal approved, then Britain could face a national election, a scenario that could lead to extending Brexit negotiations or even stopping Brexit altogether, Goldman said.
“Although UK political dynamics have raised the likelihood of a no-deal scenario, we continue to believe it is relatively low,” Goldman said.
There is deep concern in boardrooms about the prospect of Britain leaving the bloc without a deal, or with a deal that would silt up the arteries of trade.
Goldman said its base case saw UK growth and inflation justifying further gradual Bank of England interest rate hikes.
Reuters contributed to this report