
Brexit Brief: No Deal or New Deal, Plus COVID Compression?
Arnab Das. Global Macro Strategist, EMEA, Elizabeth Gillam. Head of EU Government Relations and Public Policy and Graham Hook. Head of UK Government Relations and Public Policy.
Market fears of a No-Deal Brexit have been rising as an informal mid-October deadline for a new trade deal and the end-2020 expiry of the transition period loom, reducing hopes that the crushing economic impact of the COVID-19 pandemic would soften negotiations or encourage an extension. EU deals are often struck at the last minute and we do expect progress in the run up to the deadlines, but we would not bank on a comprehensive deal at this time. The signals point to moderate progress towards a “skinny” Free Trade Agreement (FTA) and a number of sectoral deals that help avert severe disruption but do not resolve key challenges, including for the UK’s large financial and professional services sectors.
Political rather than economic or financial rationales remain in the Brexit driver’s seat. Plus, already weak EU trust in the UK has been damaged by the UK’s “Internal Market Bill” (IMB), which in effect reverses treaty commitments under the EU Withdrawal Agreement, signed less than a year ago, to avoid restrictions on free movement of goods or people on the island of Ireland.
We suspect a joint political and economic calculus underpins UK PM Boris Johnson’s (“BoJo”) new UK Internal Market Bill – to distract public attention from the fumbled response to COVID, and to achieve greater flexibility in industrial policy while still securing an EU trade deal. State aid to encourage private investment in high-tech or other sectors in which the UK might catch up with world-leading firms could conceivably help narrow the skills and productivity gap, to “level-up” regions that have lagged London and the South East, where world-beating finance and professional services are concentrated. We fear that such a policy of picking winners could easily end up protecting losers, given past experience in the UK itself and elsewhere.
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Important Information
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The opinions referenced above are those of Invesco as of September 29, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.