Markets breathe sigh of relief at news of last-minute agreement

A Brexit trade deal after nine months (or four and a half years, depending on your perspective) of tortuous wrangling between the UK and the EU is expected imminently as both sides are said to be wrapping up the final stages of negotiations.

Despite the fact that any agreement that emerges will need to be voted on by UK MPs and European parliamentarians, the news is likely to be greeted by relief across global markets, assuming no last-minute snags derail the deal at the eleventh hour.

Based on details that have emerged during the negotiation process, analysts are expecting that any deal struck will leave the UK with (obviously) less favourable trading terms than EU membership, however, it is likely that the agreement will be better than trading on World Trade Organisation (WTO) terms but is expected to impact the UK economy hard given it earns 13% of GDP from EU exports compared to 3% the other way around.

Analysts at Berenberg have said that while a deal will limit some of the economic damage to the UK compared to a no-deal departure, they estimate UK potential growth will be around 1.7% in the years ahead compared to 2% if it had remained as an EU member.

In the near-term, the broker said they expect “some disruptions” at the UK-EU border due to additional customer paperwork and border checks, although this is still likely to be “much less” than a no-deal scenario.

For the EU, a deal with the UK is not expected to have a major economic impact given the size of the bloc and may even help to underpin some relationships that may have been scuppered by a no-deal Brexit.

UK outlook more positive in the medium term

Berenberg’s analysts also said that while the UK outlook is gloomy in the short term amid surging cases of coronavirus (COVID-19),  a Brexit deal will remove a large portion of lingering uncertainty about the UK-EU relationship, which alongside the rollout of a vaccine and eventually warmer weather into the spring can “underpin a rapid rebound from the double-dip coronavirus recession”.

“After declining by 11.6% in 2020, we project UK real GDP growth of 7.3% in 2021 followed by a gain of 4.9% in 2022. We expect real GDP to return to its pre-pandemic level by Q4 2022, two quarters after the Eurozone and one year after the fiscally supercharged US”, Berenberg said.

The broker added that a deal also reduces the pressure on UK policymakers at the , who will now no longer need to prepare for any disruption arising from a no-deal exit. The agreement may also help the UK’s fiscal deficit stay at what Berenberg said would be a “manageable” 3-4% of GDP once growth returns to pre-pandemic levels compared to a worst-case scenario of 6% of GDP previously forecast by the Office for Budget Responsibility (OBR).

“A deal would thus ease the pressure on HM Treasury to consider…