Brexit Scenarios and Economic Impacts
In light of Brexit negotiations, political opinion in the Conservative party and the Coronavirus itself, we have updated our Brexit scenarios and economic impacts. A narrow free trade agreement remains the base case but the likelihood of No Deal has risen while the likelihood of a broader free trade agreement has fallen.
Trade negotiations have made little clear progress though political signalling is somewhat positive
• The debate over key issues like fisheries, financial access and the level playing field have blighted the Brexit negotiations.
• This is made more challenging by the virtual nature of negotiations; where backroom coffees can’t take place to build rapport and find informal solutions.
• EU concerns about whether the UK will honour its commitments – particularly on the Irish-Northern Irish border – is driving a more robust approach on governance.
• That said, the tone from our contacts in Brussels is fairly constructive. The devil is in the detail with the post-Brexit FTA but political will is key in Brussels.
• There is still no apparent appetite for an extension before July 1st and doing so legally after that date looks much more challenging now that the UK is technically outside the EU.
Dynamics in the Conservative government suggest hard-line views are getting air time
• There has been increasing noise from inside the UK government that influential figures see coronavirus as a potential cover for a harder Brexit.
• We don’t necessarily agree with the logic of kicking the economy while it is down but the concept appears to have firm supporters.
• The political capital that Johnson spent on defending Dominic Cummings reinforces the importance of his role – a hard-line Brexit supporter – among Johnson’s advisors.
• The upshot is that the appetite and time for a broader free trade agreement seems lower while the risk of No Deal seems higher.
But there are still six months to go
• With half a year left before the hard deadline for a deal, both sides are incentivised to posture at this point and spread rumours of hard-line approach on both sides.
• We know from previous experience that politicians make promises in the Brexit process that they ultimately roll back on. The incentives on both sides have not significantly changed, which makes negotiations challenging but the ultimate deal is in both sides’ interests.
• There is also plenty of time for companies and opposition parties to make the argument against No Deal. Indeed, we expect more statements like the one from Nissan this week warning of the risks of No Deal, particularly if the government policy becomes more explicitly hard-line.
• The economic and political impacts of the COVID shock will continue to play out. We expect that some form of recovery will be underway in the autumn, so most UK firms would only be beginning to recuperate and have no appetite, ability or time to prepare for a hard exit in December.
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