Brexit negotiations will go to the brink

Brexit negotiations will go to the brink

09-11-2017 | 年次アウトルック
The Brexit saga continues, but the UK surely cannot want to crash out of the EU empty-handed.
  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

“No deal is better than a bad deal” is the mantra that the UK government keeps repeating, probably for negotiating purposes. However, in economic terms, “no deal” would be highly detrimental.

First of all, the absence of a deal does not automatically mean the UK can trade with the EU on World Trade Organization (WTO) terms. To be able to do this, a great many deals on new administrative procedures governing certification of regulatory standards, customs processes and so forth will be required.

The agreements must be reached well before Friday 29 March 2019. In fact, it is hard to see how trade can continue if these deals are not made by the summer of 2018. The problem is that so far, the UK has done nothing, nothing at all, to prepare itself for a ‘hard’ Brexit. No arrangements have been made with regard to customs, new agencies or residency rights.

Moreover, even if it were possible to trade on WTO terms almost immediately after leaving, a recent World Bank study suggests that trade in goods with the EU would halve, and trade in services would fall 60%. It would be highly irresponsible not to make a deal and therefore unlikely. So “no deal” is nothing more than an empty threat. The recent US Bombardier tariffs are a reminder that life is cold outside the largest internal market in the world.

Investment outlook 2018
Investment outlook 2018

Would you like to read the full report 'Playing in extra time'?

Download full publication
Source: Thomson Reuters Datastream / Fathom Consulting

In the meantime, the clock is ticking. The EU is demanding sufficient progress on three issues: the size of the divorce bill, the citizens' rights for EU-27 citizens in the UK and UK citizens in the EU-27, and the future of the current, ultra-soft border between Northern Ireland and the Irish Republic, before negotiations on future trading relations can start. As the UK government intends to leave both the customs union and the internal market, solving the Irish border problem looks a lot like an attempt to square the circle.

Furthermore, the UK government is in no hurry to settle the divorce bill, as it is one of the few trump cards in its hands. What we can expect is that businesses will start to panic more and more, the longer it takes to conclude a preliminary deal. At some point, the UK government will probably surrender to the fact that “no deal” is not a viable option. Nobody is under the illusion that the upcoming negotiations on the future trade relationship between the UK and the EU will be finished quickly.

In the meantime, the transitional relationship will be more or less the same as it is now: the UK will still be subject to new EU rules and to the jurisdiction of the European Court of Justice, and will still contribute to the EU budget, etc. In Florence, Prime Minister Theresa May indicated the transitional period would last for two years. However, it is doubtful that will be long enough. The negotiations regarding the recent EU/Canada deal, for instance, took seven years to complete.

Initially, the Brexit saga will continue to be a substantial drag on the economy. Only if the UK ends up remaining a de facto member of the EU for the years to come, will the drag subside. An additional benefit would be that the Irish border could remain soft for the foreseeable future.

This article forms part of the Robeco 2018 outlook entitled Playing in Extra Time.

Are there risks? Of course, there always are. One might be that a new and improved Fed will prove more hawkish than it is now. No fewer than three FOMC monetary policy committee positions are currently vacant, with Chair Janet Yellen’s term ending in February 2018. The latest rumors have it that QE critic John Taylor is now the preferred candidate to replace her, but if we have learned anything from this administration, it’s that the rumors cannot be trusted. In general, monetary policy is decided by majority vote, which makes any radical change unlikely.

What’s more, the fact that inflationary developments continue to be favorable mean there is little reason as yet to implement monetary tightening in 2018, at a point no more than two steps after the modest rate hike of December 2017.

Another risk specific to the US, is that the threat of impeachment could dampen ‘animal spirits’. This risk will likely only become critical after the 2018 Congressional elections, if the Republicans lose their majority in the House of Representatives. In that sense, the main risk to the growth outlook is the rise of protectionism as illustrated by the difficult negotiations surrounding NAFTA.

All in all, in 2018, US economic growth could easily surprise on the upside.

This article forms part of the Robeco 2018 outlook entitled Playing in Extra Time.

Investment outlook 2018
Investment outlook 2018

Playing in extra time

Read all articles

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会

本記事に関連するテーマ: