Risk & Economy » Brexit » Time for a deal

Time for a deal

With negotiations over Britain’s exit from the EU reaching fever pitch, Ana Boata, head of macroeconomic research at the world’s leading trade credit insurer Euler Hermes, explores the potential fallout from both parties failing to reach a last-minute compromise

The clock is ticking loudly as we head towards the end of 2020. Not only are global markets contending with the economic impact of the pandemic, but international relationships remain up in the air as the UK and the European Union continue to negotiate a trade deal.

With the transition period of Britain’s exit from the EU set to end on December 31, there is now a growing sense that a deal will be concluded in time – particularly following positive talks held in London last week. Yet until a deal is done, the fog of uncertainty that has hampered the private sector’s ability to plan effectively for life after Brexit remains.

So, as we head into the final furlong of the four-year journey towards a Brexit deal, perhaps now is a good time to remind ourselves of the economic importance of a deal – and why the brinksmanship of the past 12 months must ease in the interests of all concerned.

Much has been made of the ‘disastrous’ impact that Brexit will have on the long-term health of the UK economy. However, we currently predict that UK GDP will grow by 2.5 percent in 2021 in the event that a free trade agreement comes into play either on January 1 or a later stage if both sides agree they need more time for ratification and implementation.

The naysayers are not without reason, though. The UK’s import prices are expected to rise by around six per cent, with the value of the pound continuing to fall by a further three per cent. Inflation will increase, reducing corporate margins. It’s also worth noting that the aforementioned growth merely cuts into the 11.8 percent contraction in GDP that will be felt this year due to the effects of the pandemic. This will be further compounded by the nine per cent contraction we’ve forecasted in November as the second national lockdown comes to affect the hospitality and leisure sector.

But the EU will feel it too. In the event of a ‘soft Brexit’ materialising, EU export losses are likely to amount to €18bn annually – underlining the importance of EU chief negotiator Michel Barnier agreeing a constructive deal with the UK. However, the fact that we have reached this point without an agreement alludes to the strength of Britain’s position at the negotiating table. While €18bn would create a significant hole in the EU’s order book, not having an agreement in place come 2021 is likely to cost its exporters closer to €33bn.

For example, a hard Brexit would likely see Germany’s export losses nearly double from €4.2bn to €8.2bn, with transport, machinery and electricals, and chemicals firms most affected. Similar industries would also be affected in the Netherlands (€4.8bn losses), France (€3.6bn), Belgium (€3.1bn) and Italy (€2.6bn).

Some of these figures help to explain why the UK’s team feel they have a strong hand to play at the negotiating table. However, it simply cannot afford to countenance a Hard Brexit in the midst of the pandemic. Insolvencies are likely to be a major theme of the next year with a tsunami of business failures approaching despite government schemes such as furlough and the various emergency loans available.

To put it into context, a Soft Brexit scenario would limit the increase in insolvencies to 31 percent. Failure to agree a deal would see that figure increase to 51 percent. Likewise, investment in the UK would fall by an additional 10 percentage points on the 15 percent drop expected in the event of a Soft Brexit, while unemployment would rise to one in ten people.

Assessing the situation from a purely statistical point of view, it’s clear that an agreement must be reached and, even if reached by the middle of this month, the transition period should be extended to allow businesses proper time to prepare. While tools like trade credit insurance remain in place to help smooth out some of the uncertainty, an extension will ensure firms are able to continue trading across borders with confidence and that the ticking clock doesn’t break into alarm.

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