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Brexit

Brexit: what’s next? The crunch dates ahead and what investors expect


Azad Zangana

Azad Zangana

Senior European Economist and Strategist

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The UK voted to leave the European Union by a margin of 52% to 48% in a referendum held on 23 June 2016. Since then, the debate over how and when the UK’s departure would happen has dominated the news in the UK.

The December 2019 general election gave the Conservative party the majority it needed to push its Withdrawal Agreement through the UK parliament, paving the way for the UK to leave the EU on 31 January.  

However, this is far from being the end of the Brexit story. We look at what happens next for Brexit and the economy, and at what investors expect the UK’s relationship with the EU to be in one year’s time.

Brexit timeline

23:00 GMT on 31 January 2020 –  UK leaves the EU

This marks the UK’s official departure from the EU and its entry into a transition period, which is currently set to last until 31 December 2020. The UK will no longer have any members of the European Parliament but will remain in the EU’s customs union and single market until the end of the transition period. The UK will also still be party to around 40 trade deals that the EU has with other countries.

The UK can no longer choose to remain in the EU by revoking Article 50 (which is the mechanism by which countries leave the EU). It can start to negotiate trade deals with other countries, although any new deals can’t be implemented until the UK leaves the EU’s customs union.

11 February 2020 – UK GDP update

This data release will show how the UK economy performed in the final quarter of 2019.  The previous release showed that UK GDP rose 0.1% in the three months to the end of November, but shrank by 0.3% in November itself.

Azad Zangana, Senior UK & European Economist, said: “Recent UK GDP data has been heavily distorted by Brexit stockpiling and destocking as the various departure deadlines have come and gone. Overall, the data suggests that the economy is coping with the uncertainty from Brexit. Households continue to spend, though businesses remain cautious. Forward-looking indicators suggest the economy will slow further in coming months amid a subdued global growth picture.

“With the reduction in the risk of a no-deal exit, there is less of a need for stockpiling as we approach the January Brexit deadline. We therefore think near-term growth could be quite weak as existing stockpiles are used up. There is even a risk of a technical recession (i.e. two consecutive quarters of negative growth). However, we are confident the economy will recover and growth will accelerate from the second half of 2020 onwards.”

Late February / early March 2020 – Mandate to be agreed and talks to begin

European ministers are expected to meet in Brussels in late February to approve the negotiating mandate for the future relationship with the UK. Trade will be a big focus but the talks are also expected to cover areas such as defence & security, aviation, and medicines regulation.

Assuming the mandate is agreed in late February, talks are expected to start in early March.

11 March 2020 – UK Budget

This will be the first budget of the new Conservative government led by Boris Johnson. The Budget will be delivered by Chancellor of the Exchequer Sajid Javid.  

Azad said: “In their manifesto, the Conservatives promised extra spending, although the increase only represents a further 0.3% on top of existing current spending by government departments. Public investment is set to rise by 10%, but both of these figures are far less than Labour had promised.

“Nevertheless, it does signal the end of austerity. It also spells the end of the existing fiscal rules, with the current government not intending to target a balanced budget over the parliamentary period.”

26 March 2020 – First Bank of England meeting under new governor

Andrew Bailey replaces Mark Carney as governor of the Bank of England (BoE) on 16 March. The first interest rate-setting meeting for the new governor will be ten days later. The meeting will be closely watched for any signs of the BoE’s response to both Brexit and the Budget.

Azad said: “We don’t think the change of governor will result in any dramatic shift in the Bank of England’s policymaking. The Monetary Policy Committee will of course be conscious of both Brexit and the Budget. However, detailed assessments of the state of the UK economy will more likely be forthcoming in the May quarterly Monetary Policy Report. It will be the Bank’s first opportunity since Brexit to set out the analysis and projections which it uses when considering making changes to interest rates.”

June 2020 – Summit to assess state of EU-UK talks

A summit is expected to take place to assess the progress of talks on the future relationship. June is technically the final month for the UK to request an extension to the transition period beyond 31 December 2020. The transition can be extended to 31 December 2022, although the UK government has legislated against any further delay.

Late November 2020 – Deadline for deal

The EU-UK deal must be presented to the European Parliament by late November if it is to be ratified by the end of the year.

31 December 2020 – End of transition period.

If a deal has been struck, then the new relationship between the EU and UK will take effect.

If not, and no extension to the transition has been agreed, then the UK will fall back on basic WTO terms for trade with the EU. The UK will also no longer be covered by trade deals between the EU and third countries unless these agreements have already been rolled over or new deals have been made.

What do investors think will happen next?

At a series of recent investor conferences across the UK and Ireland, our economics team asked attendees what they think is going to happen next; specifically, where the UK’s relationship with the EU will be in early 2021, following the end of the current transition period.

A majority of respondents – 52% - thought a ‘Limbo Brexit’ was the most likely outcome, meaning that the transition period would have been extended and the trade deal with the EU would be still under negotiation. Interestingly, attendees in Dublin were among those to vote most strongly for the ‘Limbo Brexit’ outcome, with 68% picking this option.

Brexit-outcome-poll-chart-390646.jpg

The next highest outcome was ‘Hard Brexit’, meaning that the transition period will end as planned on 31 December 2020 and the UK will achieve a partial trade deal with the EU. This received the votes of 33%, with Bristol and Manchester seeing over 50% of respondents select this option.

Meanwhile, 10% thought the UK would still be in the EU’s single market (‘Soft Brexit’). London was the location voting most strongly for this, at 17%. There is perhaps an element of wishful thinking going on here, in a city that saw 60% vote ‘remain’ in the referendum. Very few – just 4% - of poll respondents anticipate that the UK will leave the transition period without an agreement (‘Cliff edge’).

Azad said: “The ‘Hard Brexit’ option seems the one most in line with the course the UK government is currently pursuing. It is striking that very few attendees expect no agreement and another cliff edge at the end of the transition period. The vast majority of respondents anticipate some kind of deal or an extension to the transition. Markets will be hoping they are correct. If so, it should imply significantly reduced political uncertainty and volatility compared to the past 12 months”.