- The Heads of State need to approve it (likely) before it is ratified by the UK Parliament on 19 October (tough but not impossible) and by the EU Parliament next week during the plenary session (likely). The deal lowers the uncertainty (-0.3pp of UK real GDP growth per year since 2018), and should progressively help the UK return to “business as usual”. However, mind the risk of early elections by the end of Q1 2020 and/or a second Brexit referendum.
- In the short-term, the deal will not help the UK avoid a technical recession. In the medium-term, a soft Brexit (zero tariffs) would depend on a successful set up of the technical details related to the dual-customs system between Great Britain and Northern Ireland. The unwinding of contingency stockpiling will still shave off -1.5pp of real GDP growth over the next two quarters. Hence, we expect GDP to fall by -0.1% q/q in Q4 2019 and Q1 2020. A recovery is expected thereafter, with quarterly growth reaching +0.6% q/q on average in H2 2020. Higher volatility, with a limited rise in uncertainty, can be expected during the transition period, which should last until end 2021, after which growth should return to pre-referendum levels (+1.7%).
- What does this mean for markets? The deal, even with the ensuing technical extension, should be positive for the FTSE 250, which is domestically oriented (+5%). The sterling should continue its rally (1.20 vs the EUR by year-end) since it was almost the only Brexit risk barometer. Movements in long-term government bond yields should remain limited and temporary (room for a +40bp short-lived increase in the long-end of the rates curve). Despite the temporary volatility, the global ultra-low rate environment should keep the long-end of the UK gilts curve below fair value (1.5%).
- What does this mean for corporates? Lower uncertainty, given that the probability of a no-deal scenario has significantly reduced. We expect the rise in business confidence to boost domestic investment, which contracted over the past two years. Foreign investment should also gain momentum. Labor shortages should reduce and support corporates’ margins. For Europe, the cost of uncertainty (-0.2pp of real GDP growth per year) will slowly fade away but we expect a negative base effect on Eurozone exports due to frontloading of imports from the UK ahead of the previous Brexit deadline of 31 October.
Brexit
We have a deal: So what?
Contact
Ana Boata
Allianz Trade
Allianz Trade
Lina Manthey
Allianz SE
Allianz SE
Jordi Basco Carrera
Allianz SE
Allianz SE