Brexit Risks Remain Elevated But Contained; Soft Brexit Still Most Likely Outcome

ASSOCIATED PRESS

Forward-looking updates from GeoQuant's high-frequency political risk intelligence platform. 

The House of Commons has again taken control of the legislative agenda, this time from new PM Boris Johnson who has been stalling as the UK moves toward the 29 October Article 50 deadline without a Brexit deal approved by parliament. Johnson claims to want to renegotiate PM May’s deal, but he has not offered alternatives and threatens to accept a no-deal (hard) Brexit if the deadline is reached before a deal is struck. To frustrate the PM, parliament passed a law to force an extension of the Article 50 deadline for negotiating departure from the EU, next to be debated in the House of Lords, and rejected the PM’s call for a snap election which was an attempt to sidestep another Brexit delay.

Government Risk is at a recent peak since the Brexit referendum, having risen since Johnson took power (point 2 below) above the forecast trend noted by the dotted lines. This level is slightly above when PM May led the Tories to a poor 2017 election performance that forced the Conservative Party into a coalition government well below the Brexit referendum peak in 2015. Though Johnson’s government is on life support, Institutional Stability Risk remains low relative to levels observed over the past few years, supporting our call that any Brexit will be a managed Brexit, and with a recent local peak reflecting the heightened risk of having Johnson in power. 

See the app for updates.

GeoQuant 2019

Germany | German Government Risk Rising

Germany’s far right Alternative for Germany (AfD) made gains in two eastern state elections on 1 September, signaling that Chancellor Angela Merkel’s government may not last the two years that remain in its term. As analyzed previously, Social Polarization Risk is pulling the traditional party system apart. The major parties have always been under pressure from upstart alternatives, but this trend has intensified as Germany’s two dominant postwar political parties -- the CDU and SPD -- have spent the bulk of the last 15 years in a coalition. During that time, the AfD on the right and the Greens on the left have made inroads with the dominant parties’ constituencies, revealing divisions in the coalition partners who would like to diverge from the political center that their alliance demands.

GeoQuant 2019

These pressures will build through the fall as the SPD selects a new party leader. While the divisions are strong in both the CDU and SPD, the CDU is unlikely to instigate a dissolution of the coalition that would end their longtime leader Merkel’s tenure in government. However, many CDU members, especially Merkel’s more right-leaning opponents, would likely grab any opportunity to shake things up if SPD divisions threaten the government. That possibility may be provided in December if the SPD selects a leader who wants to push the party left, regardless of the impact on the coalition.

See further analysis on the app.

Hong Kong | Extradition Bill's Withdrawal Affirms Ongoing Forecast that Protest Will Begin to Dissipate

Hong Kong Chief Executive Carrie Lam's announcement that she would withdraw a bill allowing for extradition to mainland China aligns with our forecast that the protests will not metastasize into a more destabilizing protest movement, and continues to suggest that independent intervention by China's mainland military remains unlikely. As we have previously argued (see here and here), the trajectory of China's Mass Support Risk indicator -- which we use as a proxy for risk linked to the Hong Kong protests -- continues to point toward a gradual dissipation of the protests in the coming weeks, albeit slightly later than anticipated (i.e. late September as opposed to mid-September -- as argued in our most recent priorforecast -- and in line with the announcement of additional protests for the upcoming weekend). A broader suite of our Chinese risk indicators suggests a similar interpretation of this past week’s events, including Social Polarization Risk and Institutional Stability Risk. As distinct from our earlier forecasts, heading into 2020 we now expect Chinese Mass Support Risk risk to plateau at a somewhat higher structural baseline than was observed throughout 2019/YTD, suggesting some potential for lingering discontents with the “one country, two systems” policy over the longer-term. 

Full Insight forthcoming on the app.

GeoQuant 2019

Market Movements | Spotlight on Italy/USDEUR

As divisions in the Italian governing coalition grew intense in 2019, culminating in the Lega Party’s leader Salvini splitting with the coalition and demanding a snap election in early August, the link between Italian Governance Risk and the euro’s value (USDEUR) has correlated at r = +0.65, suggesting a strong relationship between Italian coalition government weakness and the common currency for much of the EU. That correlation has risen to r = +0.77 over the past three months -- covering inflection points when Salvini demanded an election in early August, which pushed Governance Risk up and the euro down -- and again in late August, as a potential new coalition between the eurosceptic M5S and the europhile Democratic Party reduced Governance Risk ahead of recent euro strengthening. With this coalition increasingly likely to take shape, the impact of Italian politics on the euro should be positive.

GeoQuant 2019

The Month Ahead | Political Risk

The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 6 October). Red (green) bubbles indicate increasing (decreasing risk). Full trend lines available on the app. Custom insights available for clients.

HIGHER RISK IN LATAM | In Argentina an election amidst economic crisis, in Peru a push for early elections, and in Venezuela a cold (political) war showcase a range of brewing partisan alternation risks. Meanwhile in Brazil and Mexico social polarization is pressuring first-year presidents early in their terms.

GeoQuant 2019
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ASSOCIATED PRESS

Forward-looking updates from GeoQuant's high-frequency political risk intelligence platform. 

The House of Commons has again taken control of the legislative agenda, this time from new PM Boris Johnson who has been stalling as the UK moves toward the 29 October Article 50 deadline without a Brexit deal approved by parliament. Johnson claims to want to renegotiate PM May’s deal, but he has not offered alternatives and threatens to accept a no-deal (hard) Brexit if the deadline is reached before a deal is struck. To frustrate the PM, parliament passed a law to force an extension of the Article 50 deadline for negotiating departure from the EU, next to be debated in the House of Lords, and rejected the PM’s call for a snap election which was an attempt to sidestep another Brexit delay.

Government Risk is at a recent peak since the Brexit referendum, having risen since Johnson took power (point 2 below) above the forecast trend noted by the dotted lines. This level is slightly above when PM May led the Tories to a poor 2017 election performance that forced the Conservative Party into a coalition government well below the Brexit referendum peak in 2015. Though Johnson’s government is on life support, Institutional Stability Risk remains low relative to levels observed over the past few years, supporting our call that any Brexit will be a managed Brexit, and with a recent local peak reflecting the heightened risk of having Johnson in power. 

See the app for updates.

GeoQuant 2019

Germany | German Government Risk Rising

Germany’s far right Alternative for Germany (AfD) made gains in two eastern state elections on 1 September, signaling that Chancellor Angela Merkel’s government may not last the two years that remain in its term. As analyzed previously, Social Polarization Risk is pulling the traditional party system apart. The major parties have always been under pressure from upstart alternatives, but this trend has intensified as Germany’s two dominant postwar political parties -- the CDU and SPD -- have spent the bulk of the last 15 years in a coalition. During that time, the AfD on the right and the Greens on the left have made inroads with the dominant parties’ constituencies, revealing divisions in the coalition partners who would like to diverge from the political center that their alliance demands.

GeoQuant 2019

These pressures will build through the fall as the SPD selects a new party leader. While the divisions are strong in both the CDU and SPD, the CDU is unlikely to instigate a dissolution of the coalition that would end their longtime leader Merkel’s tenure in government. However, many CDU members, especially Merkel’s more right-leaning opponents, would likely grab any opportunity to shake things up if SPD divisions threaten the government. That possibility may be provided in December if the SPD selects a leader who wants to push the party left, regardless of the impact on the coalition.

See further analysis on the app.

Hong Kong | Extradition Bill's Withdrawal Affirms Ongoing Forecast that Protest Will Begin to Dissipate

Hong Kong Chief Executive Carrie Lam's announcement that she would withdraw a bill allowing for extradition to mainland China aligns with our forecast that the protests will not metastasize into a more destabilizing protest movement, and continues to suggest that independent intervention by China's mainland military remains unlikely. As we have previously argued (see here and here), the trajectory of China's Mass Support Risk indicator -- which we use as a proxy for risk linked to the Hong Kong protests -- continues to point toward a gradual dissipation of the protests in the coming weeks, albeit slightly later than anticipated (i.e. late September as opposed to mid-September -- as argued in our most recent priorforecast -- and in line with the announcement of additional protests for the upcoming weekend). A broader suite of our Chinese risk indicators suggests a similar interpretation of this past week’s events, including Social Polarization Risk and Institutional Stability Risk. As distinct from our earlier forecasts, heading into 2020 we now expect Chinese Mass Support Risk risk to plateau at a somewhat higher structural baseline than was observed throughout 2019/YTD, suggesting some potential for lingering discontents with the “one country, two systems” policy over the longer-term. 

Full Insight forthcoming on the app.

GeoQuant 2019

Market Movements | Spotlight on Italy/USDEUR

As divisions in the Italian governing coalition grew intense in 2019, culminating in the Lega Party’s leader Salvini splitting with the coalition and demanding a snap election in early August, the link between Italian Governance Risk and the euro’s value (USDEUR) has correlated at r = +0.65, suggesting a strong relationship between Italian coalition government weakness and the common currency for much of the EU. That correlation has risen to r = +0.77 over the past three months -- covering inflection points when Salvini demanded an election in early August, which pushed Governance Risk up and the euro down -- and again in late August, as a potential new coalition between the eurosceptic M5S and the europhile Democratic Party reduced Governance Risk ahead of recent euro strengthening. With this coalition increasingly likely to take shape, the impact of Italian politics on the euro should be positive.

GeoQuant 2019

The Month Ahead | Political Risk

The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 6 October). Red (green) bubbles indicate increasing (decreasing risk). Full trend lines available on the app. Custom insights available for clients.

HIGHER RISK IN LATAM | In Argentina an election amidst economic crisis, in Peru a push for early elections, and in Venezuela a cold (political) war showcase a range of brewing partisan alternation risks. Meanwhile in Brazil and Mexico social polarization is pressuring first-year presidents early in their terms.

GeoQuant 2019

I'm a Berkeley-trained political economist and entrepreneur specializing in geopolitical risk analysis. I am co-founder and CEO of GeoQuant, a startup company fusing pol...