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With the hard deadline of the end of the transition period just one month away on 31 December, the coming days truly are crucial to reach a Brexit deal. ABN Amro’s base case continues to be that a free trade agreement will be signed. However, even with a deal, Brexit has already been and will continue to be significantly economically damaging – primarily for the UK, and to a much lesser degree for its closest European trading partners.

Chief EU Negotiator Michel Barnier is traveling to London for fresh talks on Friday. Nonetheless, recent reports suggest talks are “completely stuck” and more headlines are likely during the day. Meanwhile, GBP/USD trades below 1.34. 

Key quotes

“Estimates from both official and independent institutions suggest that, even with a free trade agreement (FTA) that involves zero tariffs and zero quotas, Brexit will – over time – reduce UK GDP by around 5% compared to a scenario of continued EU membership.”

“With regard to the impact on growth in the remaining EU countries, most estimates suggest that the impact on aggregate GDP growth in the short term will be around a fifth to a quarter of the impact on the UK economy, while the longer-term impact is expected to be negligible. The impact will be largest on the UK’s main trading partners – Ireland, the Netherlands and Belgium.”

“Estimates both by the UK government and the LSE suggests a no deal Brexit would lead to an additional 2.5% long-term fall in GDP relative to a FTA deal. The UK and EU’s regulatory regimes are likely to see an even sharper divergence in a no-deal scenario. However, in either scenario the effect of both border checks and nontariff barriers is significant, and moreover it is much bigger than the effects of former PM Theresa May’s proposed hypothetical deal. The current government has taken a radically different course in opting for a free trade agreement with the EU, and as such, the difference between a deal and no-deal scenario is much smaller. 

“Finally, note that even according to the UK government’s own analysis, the potential mitigating effect of new trade deals with non-EU trading partners is tiny – in the order of 0.2-0.3% at most, which does not even remotely offset the negative effects of Brexit.”

 

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