GBP Brexit Timeline – new deadlines, more ‘oomph’ needed

Renewed momentum

After UK PM Johnson met with the three EU Presidents last week, a new mood of conciliation and an accelerated timetable for more positive talks over the summer are now in place. Both sides are aiming for an agreement that offers tariff and quota-free trade with neither the benefits or costs of membership of the single market. The new impetus is to decide on the principles of an agreement before negotiating the finer details. Of course, the coronavirus crisis will keep leaders pre-occupied for the near-term leading many to believe a breakthrough won’t emerge until the autumn. The end of October is seen as the effective deadline for an agreement given the need to ratify it in time for the end of Britain’s post-Brexit transition period on December 31, or “economic Brexit” as Michel Barnier has called it.

Hard and fast negotiations ahead

That such a positive outcome would require both the UK and EU to compromise is evident, but a deal looks to be in the clear interests of both sides. This is especially the case given the current environment with the severe disruption of long-distance supply chains and the fragile economic recoveries on both sides.

The EU has signalled its willingness to move on key sticking points so the focus will be on the significant disagreements over fundamental aspects of a trade deal. These include the EU’s demand to retain access to UK fishing waters, where both sides hoped to conclude an agreement by July 1, the wish in Brussels to encompass all parts of the future relationship into a single legal act and disagreements over how to build a regulatory ‘level playing field’ to protect companies from unfair competition.

This latter issue highlights where compromise will be required and the UK appears to have accepted that a simple FTA can't provide both frictionless trade and freedom to diverge, meaning it may have to sign up to certain ‘level playing field’ conditions. Similarly, on fishing, the EU might have to accept that it will not get status quo access to the UK’s waters.

Covid-19 impact

Undoubtedly the pandemic shock has left firms more vulnerable and less able to cope with more economic disruption. The UK has also suffered the worst in terms of the depth of the economic contraction and pace of recovery. Yet politically, the impact of the virus could bolster the UK’s resolve to break ties. A peak-to-trough fall of about 25% in UK GDP in just two months makes the economic impact of a ‘hard’ Brexit (GDP 8% lower over 10 years?) seem less dramatic, while massive fiscal stimulus is already in place with an Autumn Budget gearing up for more support.

The other issue as mentioned above is simply that all governments are currently working through multiple pandemic measures which means there is little time (less than seven months) to conclude a deal. It notoriously took the EU and Canada eight years to provisionally conclude the CETA deal, when negotiations began in 2009.

Expectations of a simple FTA

Markets are generally thinking that there will be no major breakthrough during the summer, but the two sides will reach a free trade agreement in the autumn. This will probably only cover goods and not services, with some form of further implementation period for firms to adjust to the new relationship.

The impact on sterling will be dependent on the scope of the deal and if there's an implementation period. Of course, reaching agreement will be positive and if there's good progress in negotiations as well, especially with GBP positioning fairly neutral currently. That said, a ‘no deal’ Brexit is still a material risk and we know that these negotiations can go down to the wire – it's always easier to sell a political compromise closer to the deadline, so you don’t then look ‘weak’ domestically.