The final countdown may take longer

  • Given the EU`s tough stance on renegotiations and the tight deadlines, an extension of Article 50 looks increasingly likely. A decision to extend the exit date, opens 3 relevant options: (i) a renegotiated Brexit deal allowing the UK to exit the customs union after a predetermined period of time; (ii) a second referendum; (iii) a softer Brexit following a change in political leadership.
  • While the cliff-edge scenario will likely be avoided, the uncertainty about the conditions of an exit and the Trade relations after exit will remain significant. The reluctance of investors and dampening effects on trade will presumably cut annual real GDP by 0,3 pp leading to an economic growth of +1.2% in 2019 and +1.0% in 2020.
  • From an economic point of view, a sensible long-run agreement between the UK and the EU would require a workable compromise on the Irish border issue, zero tariffs on goods and “passporting rights” for the UK`s financial sector. As the UK also wants autonomy in negotiating trade relations with non-EU countries, a Norway type of Free Trade Agreement would be required. But at present there does not seem to be majority for this kind of a solution in the UK. Alas, the negotiations on future trade relations will be at least as difficult as on the exit agreement. Therefore we expect a prolonged transition period beyond the end of 2021. Uncertainty will prevail and growth in the UK economy might not exceed an average +1.5% over the transition period.

Press contact

Dr. Lorenz Weimann
Allianz SE