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The agreements with the EU and the US, "critical" to avoid another recession after Brexit



Boris Johnson's government has scored a great post-Brexit goal with the trade agreement reached with Japan -its fourth largest trading partner outside the EU-, for which 99% of mutual trade goods are exempt from tariffs. But this treaty is clearly insufficient if it is not accompanied by an agreement with its main partner, the European Union (EU) and with the US. In fact, experts predict that the economic damage of a commercial isolation of these characteristics will send the country to a new recession in 2021.

"The signing of trade agreements is a top priority"says Aaron Barnfather, a manager at Lazard Asset Management. "Despite progress with other trading partners, securing agreements with the Twenty-seven and the United States will be absolutely critical in the coming months," he stresses.

Since Brexit day, January 31, 2020, London has been free to negotiate its own deals for the purchase and sale of goods and services. "However, these are extremely complicated agreements to secure, particularly in the short term that elapses between now and the end of the transition period, after which the country will no longer be part of the single customs union," explains the analyst . On August 1, 2020, the United Kingdom had tied 19 trade agreements with 42 countries, which is now also joined by Japan.

Despite the steps taken, the British government will have to move quickly if it hopes to avoid a sharp disruption to trade next year. The talks between the UK and the EU, in which 525,000 million euros are settled, still in neutral. Although this week the two negotiating teams have overcome the pothole of the punch at the table by Johnson, who threatened to enforce the self-imposed deadline of October 15, the lack of progress continues to weigh on the negotiations.

The issues under discussion are the same: the provisions on level playing field (in particular state aid), fisheries and dispute resolution mechanisms. It is also hard to imagine the two parties reaching an agreement while problems related to the internal market bill persist, on which London has given signs of making some kind of assignment.

But, in addition, 126,500 million euros of exchanges with the US are not insured either as soon as London comes out from under the Brussels umbrella. The electoral result in the United States throws another dose of uncertainty, since a victory for the Republican candidate, Joe Biden, in the presidential elections on November 3 will destroy the promise of fruitful commercial relations of the President of the United States, Donald Trump.

For all these reasons, the country's economy will be seriously truncated in 2021. Brexit has been a drag on UK economic growth for the past four years. In fact, since the vote in favor in June 2016, the UK economy has underperformed its global counterparts "and political decisions in the face of the Covid-19 pandemic have only made things worse," argues the Lazard manager.

Moody's estimates that the country's economy is already 2.5% smaller than it would have been without Brexit. That equates to a nearly a quarter percentage point reduction in real GDP growth for every quarter since the referendum more than four years ago. As if this were not enough, it is likely that pandemic exacerbates the impact of divorce.

Barnfather, for his part, believes that a tough exit with few or no deals in place for crucial areas such as trade in goods and financial services "could see the UK return to negative growth early next year and could also stifle the EU's recovery from the coronavirus crisis".

Therefore, the manager foresees that "a semi-direct hard exit", in which both parties would agree to some modest provisional measures to avoid a disorderly breakup but without reaching an agreement. Trade would violate the rules of the World Trade Organization (WTO), as long as the negotiations continue their course. This outlook would be equally damaging for the UK economy, "as continued uncertainty would weigh on business investment and market sentiment," Barnfather said.

It is also possible that the current uncertainty and disruption arising from the pandemic of "force both parties to agree to some form of extension". "However, a large conservative majority in Parliament and Boris Johnson's determination to 'end Brexit' make this scenario unlikely," the expert rounded off.

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