Since the EU Referendum back in June 2016, we have seen a very lengthy period of negotiations and political disagreements that have dominated the news and affected investor sentiment towards the UK. The convincing Conservative Party victory in the December 2019 General Election gave them the necessary majority they needed to push the Withdrawal Agreement through parliament and the UK finally left the EU on 31st January 2020.
However, this is not the end of Brexit and instead it is effectively the closure of the first stage. Following the UK’s official departure from the EU, it has entered the transition period and this is currently set to be in place until 31st December 2020. This means that the UK no longer has any members of the European Parliament and it cannot take part in the political processes of the EU, but it will remain in the EU customs union and single market until the end of the year. This does also mean the UK will continue to benefit from EU trade deals with other countries during this period.
It is now not possible for the UK to elect to remain in the EU by revoking Article 50 and whilst it can begin to negotiate its own trade deals with other countries, these cannot be implemented until the UK has left the EU’s customs union.
What happens next?
Discussions are now taking place, both in the UK and the EU, to approve their respective negotiating mandates that will set out each side’s position in the forthcoming talks over their future relationship. This will cover issues such as what happens if the UK should diverge from EU standards and who decides if either party has broken the agreement and the consequences of doing so.
The main focus of the more granular talks will be trade, which will encompass a wide range of different sectors, but they are also expected to cover other areas such as defence & security, law enforcement, medicines, regulation and aviation.
The formal talks between the UK and the EU are expected to commence in early March. A summit is then expected to take place in June to assess the progress of the talks. In addition, 30th June is technically the final date on which the UK can request an extension to the transition period beyond 31st December 2020, although the UK Government has already legislated against any further delay beyond this date.
If a deal is agreed, in order for it to be ratified in time for the end of the year, it is expected that it will need to be presented to the European Parliament by late November. Provided the deal is fully agreed, this new relationship will take effect at the end of the transition period.
However, if no deal has been agreed and there isn’t to be an extension to the transition period, the UK will revert to the basic WTO (World Trade Organisation) terms for trade with the EU and this will mean the prospect of tariffs on exports to the EU. In addition, the UK will no longer benefit from the trade deals agreed between the EU and other countries.
Market and economic reactions
As we move through 2020, it is likely that the news will continue to focus on Brexit and the trade discussions in particular. As we saw with the negotiations over the UK’s exit from the EU, it is likely that sterling will be the main barometer over how the talks are perceived to be proceeding and whether or not the chances of a ‘hard’ Brexit outcome on 31st December 2020 is still possible.
The UK economy did flirt with a potential recession in 2019 owing to ongoing uncertainty caused by the Brexit discussions and concerns over the nature of its exit from the EU. Whilst there have been some tentative positive signs so far this year following the Conservative Party’s surprisingly strong General Election victory, the future prospects for the economy are likely to be dependent on the progress the UK Government makes in its trade negotiations with the EU. If the Government can avoid negative headlines, it is possible that we could see a recovery in business confidence and investment and in turn, the wider economy.
Overall, it is possible that we will see further periods of volatility throughout this year, particularly if the newsflow from the trade talks indicate that the UK could still endure a hard Brexit. However, if the UK can make progress on its trade talks with the EU and even if it cannot agree a complete deal, a sectoral approach could still reduce the chance of a no-deal exit at the end of the transition period and this is likely to be beneficial for both the economy, business confidence/investment and investor sentiment.
CA4924 exp 06/2020