UK parliament to reject May's EU divorce deal, say economists

By Jonathan Cable

LONDON (Reuters) - The British parliament will vote down Prime Minister Theresa May's Brexit divorce deal on Tuesday, all 40 economists polled by Reuters said, although the country is eventually expected to reach a free trade agreement with the European Union.

But in a twist in the latest poll, the chances of no deal have slipped and are now less likely than Brexit being cancelled - a first since Reuters started asking this question in late 2016, the year of the referendum.

May has so far been unsuccessful in convincing MPs to back her withdrawal agreement - she has already postponed a parliamentary vote once - and the terms on which Britain leaves the EU on the scheduled March 29 date remain very uncertain.

There is now a median 23 percent chance of a disorderly Brexit, slightly lower than in a December poll, suggesting economists think a deal will eventually get passed.

"All the signs point to a big defeat for the government on Tuesday. Evidence of the withdrawal agreement's unpopularity is likely to be enough to win material concessions from the EU in our view, as avoidance of a disorderly exit is very important for their economic prospects too," said John Wraith at UBS.

"A second vote, assuming such concessions are made, has a much better chance than some appreciate."

Of the 40 respondents polled in the past few days who said the vote would not pass on Tuesday, 25 said it would be followed by another reading and 14 said Britain would request an extension of the March 29 deadline.

May has refused to move away from her unpopular deal, which envisages close trading ties with the EU but without any say on EU policy as Britain has now.

Asked to predict what would most likely happen next if May's deal is voted down, one said there would be a general election. No respondent said the next move would be another referendum or a cancellation of Brexit - something May said on Sunday would be catastrophic for democracy.

And only two of 41 respondents to another additional question said a reversal of the 2016 vote was the most likely eventual outcome to the Brexit negotiations.

"With there seemingly being little appetite overall in parliament for a 'no-deal' Brexit, we suspect that some manoeuvring will occur to ultimately get a deal passed in parliament before the end of March," said Howard Archer at EY ITEM Club.

As in all Reuters polls since late-2016, the vast majority of economists said the two sides would settle eventually on a free-trade deal.

However, now in second place was Britain being a member of the European Economic Area, paying into the EU budget to maintain access to the EU's single market. Third spot went to Brexit being cancelled, moved up from last place.

Slipping to fourth place from second was leaving without an agreement and trading under basic World Trade Organization rules.

"We expect parliament to find a way to block a no-deal Brexit," said John Hawksworth at PwC.

SLOW AND STEADY

The poll predicted Britain's economy would expand 0.3-0.4 percent per quarter from now till mid-2020, largely underperforming its peers.

It will grow a modest 1.5 percent this year and next, according to the poll of 77 economists, slower than it was expanding before the EU referendum.

Still, there is only a median 25 percent chance of a recession this year and a slightly higher 30 percent chance of one in the next two years, unchanged from December.

Although inflation is coming down towards its 2 percent target - the poll predicted prices will rise 2.1 percent this year and 2.0 percent next - the Bank of England is expected to take a slow and steady approach to tightening monetary policy.

Only one of 68 economists expects a change in the main interest rate from 0.75 percent on February 7. The median view in the poll is for an increase of 25 basis points in the third quarter, later than thought last month, with an identical increase early next year.

The main rate is expected to end 2020 at 1.50 percent.

(Polling by Sumanto Mondal, Richa Rebello and Sarmista Sen; Editing by Gareth Jones)