The withdrawal notification sent by the UK government to the European Council on March 29th triggered the two-year countdown specified by Art. 50. As a result, we expect the ratification of the EU exit agreement to be held between Fall 2018 and March 2019. Divorce talks will mainly focus on the UK’s outstanding commitments, the end of the UK inclusion in several EU institutions and the rights of EU citizens living in the UK and vice versa.
The UK economy will continue to be resilient during the negotiations period but consumer spending would take a hit from higher inflation and slowdown in wages, and investments could go into wait-and-see mode. Overall, we expect UK GDP growth to slow down to +1.4% in 2017 from +1.8% in 2016 and to +1.0% in 2018.
The two-year timeframe is not realistic to agree on both the exit deal and the trade deal. We thus expect both parties to adopt a transition deal (80% probability) covering EU-UK relations to bridge the gap between the end of Brexit negotiations and the final Free Trade Agreement (FTA). A final deal could come in 2021 after the H1 2020 general election. Our baseline scenario is a Limited FTA where selective sectors would be dutyfree while others would be subject to tariffs. Annual GDP growth should slow down to +0.3% in 2021.
In the UK, impacts would be visible on households, companies, markets and policymaking.
Source : Allianz