As widely expected, Prime Minister Theresa May won Wednesday night's Conservative Party confidence vote by a margin of 200 to 117.
The opposition voiced by a third of her party underscores deep divisions over her leadership and on Brexit negotiations. But she can now refocus on delivering Brexit, as further vote of confidence cannot be called for 12 months.
In coming days the PM will attempt to secure stronger assurances from her EU counterparts on the Northern Ireland backstop. While the EU has maintained that they will not reopen the agreement only on this one topic, Theresa May will try to seek reassurance that her EU counterparts will not use the backstop as leverage in future economic relationship negotiations.
Her victory in the vote of confidence might give her a little more leverage, as it demonstrates the backing of her party, and market sentiment has improved a little as seen by the recovery in sterling. But the prospect of any meaningful change in the existing deal appears very limited. The UK Government has committed to a vote by January 21st.
The range of possible scenarios following a “no vote” on the Withdrawal Agreement could include revoking or suspending Article 50, a second referendum, general election or a Brexit with no deal – either managed or disorderly.
As we near the end of January, the risk of no-deal will become increasingly pressing. The PM may have to seek a greater cross-party support to her of another Brexit deal. The agreement, amended or not, may start to appeal to some MPs as a better option than leaving with no deal.
The ruling yesterday by the ECJ that permits the UK to unilaterally revoke Article 50 opens the (unlikely) possibility that Brexit may not happen at all. This might cause determined Brexiteers to accept the deal – as not accepting might otherwise lead to revoking Article 50.
The complex and wide array of potential outcomes creates more uncertainty. This will keep sterling volatility elevated and put downward pressure on UK domestic assets. Business and consumer sentiment will be further dampened in the short term, and this could result in lower investment and spending. The fall in sterling is likely to lead to a temporary impact on inflation, which would erode consumers’ real income growth.