Goldman Sachs sees greater chance of Brexit being scrapped altogether after historic defeat

  • British lawmakers voted overwhelmingly to reject Prime Minister Theresa May's proposed template to leave the EU on Tuesday evening.
  • Defeat for the U.K. government comes with time running out before the country leaves the bloc on March 29.
  • Immediately after the result was announced in the House of Commons, opposition leader Jeremy Corbyn tabled a motion of no-confidence in the government.
Theresa May, U.K. prime minister, departs from number 10 Downing Street to attend a weekly questions and answers session at Parliament in London, U.K., on Wednesday, Jan. 16, 2019.
Simon Dawson | Bloomberg via Getty Images
Theresa May, U.K. prime minister, departs from number 10 Downing Street to attend a weekly questions and answers session at Parliament in London, U.K., on Wednesday, Jan. 16, 2019.

The worst parliamentary defeat for a British prime minister in modern times has increased the likelihood of Brexit being scrapped altogether, Goldman Sachs said Wednesday.

British lawmakers voted overwhelmingly to reject Prime Minister Theresa May's proposed template to leave the EU on Tuesday evening, thrusting the world's fifth-largest economy even further into political chaos.

Defeat for the U.K. government comes with time running out before the country leaves the bloc on March 29.

"We still expect a slim majority of MPs to ultimately consent to a close variant of the current Withdrawal Agreement," Goldman Sachs' European economist Adrian Paul said in a research note published Wednesday.

But, the nature of May's Brexit vote defeat does "skew the risks to that base case further in the direction of a softer, later Brexit — or no Brexit at all," Paul said.

Vote of no-confidence

The 432 to 202 vote against the prime minister's Brexit deal underscored the ruling government's failure to build a parliamentary consensus behind any single vision of how to exit the EU.

Immediately after the result was announced in the House of Commons, opposition leader Jeremy Corbyn tabled a motion of no-confidence in the government.

This vote is expected to be held at around 7:00 p.m. London time on Wednesday.

However, most external observers do not expect the no-confidence vote to pass. Despite May's huge loss on her Brexit deal, enough lawmakers have signalled they will vote for her government to remain in power.

"We think the prospect of a disorderly 'no-deal' Brexit has faded further. That sharper skew implies a greater probability of an extension to the 29 March Brexit deadline embedded in Article 50," Paul said.

Nonetheless, an extension of Article 50 to push back the March 29 deadline is no simple task. That's because all EU countries would need to agree to a deadline extension at a vote of the EU Council. And, with European parliamentary elections scheduled in May, the bloc is not expected to favour a significant delay to the Brexit process.

Ahead of Tuesday's parliamentary defeat, Britain's Brexit Secretary Stephen Barclay also ruled out the possibility of the U.K. government seeking to extend the March 29 deadline.

All Brexit options 'back on the table'

"If May does not manage to secure support for her preferred option of leaving the EU with a Withdrawal Agreement, then all other options are back on the table," Dean Turner, UBS wealth management economist, said in a research note published Wednesday.

"All the other options, including a renegotiation of the deal toward a softer, Norway-type arrangement, a general election, or a second referendum will unquestionably require a delay to the 29 March leaving date," Turner said.

Sterling was trading around 0.1 percent lower at $1.2842 on Wednesday morning. The U.K. currency has fallen more than 13 percent against the U.S. dollar since the 2016 referendum.