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A post-Brexit trade deal continues to hang in the balance. The risk of no-deal is very high, but economists at ABN Amro doubt such a scenario would last long; a deal would likely be concluded in the course of 2021. Even with a deal, though, Brexit will inflict significant damage on the UK economy. The bank expects the productive capacity of the UK economy to be 5% lower over time than if it had remained an EU member.

At the time of writing, GBP/USD is holding onto its gains, trading 0.2% up on the day around 1.3485.

Key quotes

“Our base case continues to be that a deal will be struck. If it is not and the UK exits without a deal, then an agreement is likely in the course of 2021. However, regardless of when or whether a deal is signed, Brexit will cause immense damage to the UK economy, and to a lesser extent to the remaining EU members. Some of that damage will be visible immediately in the early part of 2021, albeit masked by the effects of the pandemic.”

“For 2021, the UK will lag the eurozone and the US in its recovery to pre-covid levels of activity, despite an earlier vaccine roll-out. In the longer run, the degree of damage will depend on how far the UK diverges from EU norms, which will in turn determine how severe non-tariff barriers to trade will be. Our base case is that 10 years after the referendum, the UK GDP will be around 5% lower than it would have been had it voted to remain in the EU.”

“In the long run, UK GDP would be around 7.5% lower in a no-deal scenario than if the UK had remained an EU member, compared to 5% lower if the UK agrees a trade deal.”

“Our expectation is for the UK economy to contract -10.9% in 2020. This compares with -7.6% in the eurozone and -4.3% in the US. The UK, therefore, has much more lost ground to make up in 2021, and although we expect headline growth to be higher in the UK than most other countries, the economy will still be around 3.5% below pre-pandemic levels by the end of 2021, compared to a 2.7% shortfall in the eurozone, and just 0.2% in the US.”