Brexit is clearly not a priority right now. But with negotiations shelved due to the coronavirus, it is becoming increasingly likely that the government agrees to extend the transition period beyond 31st December 2020. This is now our baseline assumption.
- Brexit is clearly not a priority right now. But with negotiations shelved due to the coronavirus, it is becoming increasingly likely that the government agrees to extend the transition period beyond 31st December 2020. This is now our baseline assumption.
- Previously, our economic forecasts were based on there being a fudge that prevented a big step change in the UK/EU trading rules at the end of the year. But the coronavirus crisis has prevented Brexit negotiations from progressing at the speed necessary for this to happen. Even if the negotiations were seamless, 11 months was a challenging time frame compared to the average EU negotiation period of three and a half years. (See Chart 1.) And the virus has led to the cancellation of the second and third round of talks. Meanwhile the EU’s chief negotiator, Michel Barnier, has contracted COVID-19, and yesterday the UK Prime Minister, Boris Johnson, was taken into intensive care with the virus. A deal of any sort seems very unlikely within the remaining nine months of the transition period, a lot of which will be spent dealing with the coronavirus.
- The government has two options; leave the transition period “on time” on 31st December or extend it. Thus far the government has insisted that it will not extend the transition period. If so, come 1st January 2021 the UK’s goods and services trade with the EU would be subject to tariffs and customs checks, UK financial firms would not be able to sell as easily to the EU, but the UK would be free to ignore all EU regulations. The step change in the trading relationship would be similar to a no deal Brexit at a time when firms are still recovering from the coronavirus. Despite this, the government might still choose to press on so it could fulfil the main pledge in the Conservative manifesto. Also, it might like the idea of any adverse economic impact being masked by the recovery from the coronavirus recession.
- But it is becoming increasingly likely that the government instead backs down and opts for an extension. This would allow time for some sort of deal to be reached and could reduce the burden on businesses when they are already extremely vulnerable. And there is increasing public support for this pragmatic approach. Opinion polls show that the British public agree that PM Johnson should put Brexit to one side to focus on the pandemic, and some prominent Brexit supporters have also voiced support. (See Chart 2.)
- Officially, the transition period can only be extended by either one or two years if the UK and the EU agree to do so before 1st July 2020. This would be the most straightforward option. But we wouldn’t rule out the UK brokering a shorter extension just to make up for the time lost to the coronavirus, of six months for instance, or an extension being agreed sometime after the 1st July. And since the government previously wrote into law that the transition period must end on 31st December, any extension will require Parliament to approve it with a vote.
- Overall, any of the above options remain possible. But it now seems most likely that some sort of extension will be agreed. As a result, from now on we will be basing our economic forecasts on the assumption that the transition period is extended.
Chart 1: Time to Negotiate EU FTAs (Years)
Chart 2: Public Opinion Polls (% Respondents)
Source: Institute for Government
Sources: whatukthinks.org, Capital Economics
Andrew Wishart, UK Economist, +44 7427 482 411, email@example.com