By Tom Wickers, Hottinger Investment Management
Last year, news channels continued to berate our eardrums with the 2016 word of the year; Brexit[i]. We experienced a somewhat oxymoronic year where headlines generally highlighted that there was no change and so, no news. Over the Christmas holidays, the withdrawal agreement was eventually passed through the House of Commons and the country came to its first unanimous agreement in a long time; to not discuss it again for as long as possible. COVID-19 has provided news anchors with alternative talking points but as summer has left us, Brexit has raised its ugly head again. Public discontent rescinded at the turn of the year, returning in part with COVID policy displeasure [Figure 1]. The government will likely be mindful to keep an eye on these figures as Brexit frictions return to the fore.
Fishing waters aside, the sticking point revolves around sovereignty, put simply the UK wants it in full and that concerns the EU. The Conservative Party houses several powerful players, such as Dominic Cummings, who are keen advocates for independence and hence the government does not have much wiggle room on its position. The EU cannot agree any significant deal with a country in close proximity that is effectively threatening to compete on taxes, subsidies and ethics, or would risk undermining its member countries and existing trade partners. The rift is large and neither Mr Frost nor Mr Barnier seem willing or able to bridge the gap. To provide some context for the gamblers among us, bookmakers currently have the odds of no trade deal being agreed in 2020 at 4/7[iv] and the most likely scenario by some way is one with no delay and no deal.
The chance of no deal being agreed in 2020 is considerable and is getting larger. Should Boris Johnson stick to his word and not agree to a delay[v], lack of progress in the next two months will mean the UK separates from the EU on WTO trading rules. For some, it is a small price to pay for our sovereignty, for others it is a catastrophe that will cause many economic frictions going forward. There will be those who are confident in the UK’s ability to negotiate better economic fortunes in new geographies to compensate for the economic damage from loss of trade with the EU. Nonetheless, recent economic studies still provide an important base case scenario of what we may expect for our economy following COVID-19 and a no-deal Brexit.
The Bank of England (BoE) forecasts a 9.5% contraction in GDP this year as a result of the COVID crisis[vi], the likes of which we have not seen for 100 years. A blip from a no-deal Brexit has therefore been argued to be menial by some. Comparing the events over a longer term unfortunately yields different results. The BoE currently predicts the permanent scar from COVID-19 to be in the region of a 1.5% reduction in GDP[vii] from its long-term trend. Similarly, roughly half of the major economic forecasts for a Brexit with a WTO trading-scenario knock 2% off UK GDP in relation to a Free Trade Agreement[viii]. A combination of the two could have compounding effects as fiscal policy loses its spending power, resulting in a difficult road ahead for our economy.
Tough talk is a must when trying to negotiate a good deal. Nevertheless, the increasing risk of no reconciliation will have many economists flustered. The government and UK economy may yet surprise the majority of forecasters with impressive foreign policy and innovation, but the base case is dour. We will be keeping a close eye on the negotiations in the coming weeks, beginning with the eighth-round tomorrow.
[i] https://www.collinsdictionary.com/word-lovers-blog/new/top-10-collins-words-of-the-year-2016,323,hcb.html
[ii] https://whatukthinks.org/eu/questions/how-well-or-badly-do-you-the-government-are-doing-at-negotiating-britains-exit-from-the-eu/
[iii] https://www.ft.com/content/f798a3a0-1ce3-4082-8780-6f172f70779e
[iv] Odds taken as of 07/09/2020 https://www.oddschecker.com/politics/brexit
[v] https://www.foxnews.com/politics/boris-johnson-brexit-delay-coronavirus
[vi] https://news.sky.com/story/coronavirus-uk-to-nosedive-into-recession-after-covid-19-triggers-record-slump-12047281
[vii] https://news.sky.com/story/coronavirus-damage-to-economy-may-be-worse-than-feared-bank-of-england-rate-setters-warn-12061817
[viii] Original source: Institute for Government. Assesses only the economic houses that provide predictions for both a World Trade Organisation trading scenario and a Free Trade Agreement trading scenario. https://www.ft.com/content/4440f83d-7e8a-4510-b8b7-3fb9146da51a
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