Brexit: chance of a deal rises as talks restart

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● The final sprint for a deal: Face-to-face negotiations between the UK and the EU are set to restart today. It comes less than a week after the UK prime minister put the brakes on the talks. Last night, the two sides published a 1o-point plan that was agreed by chief EU negotiator Michel Barnier and chief UK negotiator David Frost. The joint “organising principles” include plans for intensified talks and for the two sides to begin work on a joint legal text.

● A positive signal: While the details remain vague on issues of substance, such as how the two sides can bridge their differences on key sticking points (level playing field, governance and fisheries), we can nonetheless take three positives from the news:

1) the resumption of talks on its own is meaningful and signals that both sides see a point in restarting them;

2) the decision to move to daily talks (including weekends), with the negotiations across all elements of a potential deal continuing concurrently, suggests that the two sides expect to have some new substance to negotiate seriously over; and

3) since working out the joint legal text is usually the final stage of any international agreement, it signals that the two sides must be in general agreement across a sufficiently large number of areas already.

● Johnson claims a victory, but can he sell it? After UK Prime Minister Boris Johnson’s earlier chest thumping, he can portray the decision to intensify the talks and begin writing the joint legal text as a win for the UK. It will play well with Johnson’s pro-Brexit audience at home and in Westminster. However, Johnson probably knows that, if he really wants a deal, he will have to make serious concessions to the EU on level playing field and governance. This is not straightforward. We remain sceptical that the influential Brexit wing of his party could swallow a deal on terms that are also acceptable to the EU. This keeps open the potential risk that the talks will fail again in the end.

● 50/50: Reacting to the positive developments, we increase the chance we put on a deal worth its name to 50%, from 30% previously. We also lower the probability of a semi-orderly hard exit to 40% from 50% and cut the risk of a complete bust-up that ends in a disorderly hard exit to 10%, from 20%.

● The benefits of a deal: The positive shift in risks towards a sensible outcome that avoids a hard exit tilts the risks to the UK’s medium- and long-term economic outlook to the upside. A deal by 31 December when the UK leaves the single market – plus likely measures to ease the switch in sectors not covered by the agreement, such as parts of financial services – will mean much less disruption on 1 January 2021 versus a no-deal outcome. Stronger business and household confidence can support solid gains in investment and consumption as the UK continues to recover from the deep COVID-19 recession. It tilts the risks to our projection for UK real GDP growth of 6.6% in 2021 and 2.4% in 2022 to the upside. In the long run, a comprehensive UK-EU agreement that includes a free trade agreement in goods and some measures to support services trade can lift UK growth potential to 1.7%, from 1.5% in the case of a no deal.

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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