The British economy has been hit by the epidemic. Now, after a meeting of European Union leaders decided that not enough progress had been made in talks on a new trade deal with the United Kingdom, Johnson faces a difficult choice: Does he continue discussions past his own deadline, or withdraw?
The empty-handed move would lead to trade disruptions when the transition period ends later this year, reducing more than $ 25 billion from the UK economy in 2021 compared to the scenario where a limited free trade deal is agreed upon, according to CNN Business analysis based on forecasts from Citi and The Institute for Financial Studies. This would put the country further behind in its efforts to recover from the historical trauma of the epidemic.
“The combination of Covid-19 and exit from the European Union’s single market makes the UK’s outlook exceptionally uncertain,” Lawrence Boone, chief economist at the Organization for Economic Cooperation and Development, said in this week’s report. “Actions taken to respond to the pandemic and decisions made regarding future trade relationships will have a lasting impact on the UK’s economic trajectory for years to come.”
Little progress in the deal
The clock is ticking until the UK and the EU agree, as Britain is set to lose its favorable trade position with the bloc at the end of December.
This week’s meetings concluded without any major breakthroughs. Fishing rights and a future dispute resolution framework remain major sticking points, according to Mojtaba Rahman, managing director for Europe at Eurasia Group, a political risk advisory firm.
“We do not believe that the deal will falter because of the fish,” Abdel-Rahman said on Thursday. “But we do believe that the technical and political challenges it pose will be more difficult to overcome than many people think.”
Johnson had said that the terms of future trading arrangements should be reached by mid-October to give companies enough time to plan the outcome. The deadline has now come and gone.
The European Union said on Thursday it was ready to continue discussions in the coming weeks. But the UK’s chief negotiator, David Frost, said on Twitter that the EU Council’s conclusions had left him “disappointed” and that Johnson would determine the UK’s position on Friday.
He said: “While the Johnson government is tearing itself apart by the Corona virus, the need for a political victory, which can only be achieved with a deal, is greater than ever.”
Corporate sound alarm
Confusion about the next direction to Brexit could not come at a worse time for the UK.
Citi and IFS estimate that the UK economy will contract by 9.4% this year. This would be the largest drop since 1921, according to data from the Bank of England. The additional restrictions that go into effect could make things worse.
An unorganized separation from the European Union at the top of the coronavirus recession will only prolong the recovery.
With a limited trade agreement, the UK economy is set to rebound with 4.6% growth in 2021 before losing some momentum between 2022 and 2024, according to IFS and Citi projections. Failure to strike a trade deal with Europe would cut one percentage point below this level of growth. The difference is roughly 20 billion pounds, or more than 25 billion dollars.
According to economists at Citi and IFS, even the best-case scenario for a limited trade agreement would leave the British economy 2.1% smaller in 2021 than it would have been if the transition period were extended indefinitely.
With great uncertainty surrounding the outlook, companies are expressing concern about the next few months.
In a poll of more than 950 executives released Friday by the Institute of Directors, nearly a quarter of respondents said they were unsure of their preparedness for the end of the transition period.
“The prospect of not reaching an agreement would be frightening enough, let alone deal with it in the midst of a global pandemic,” said Ali Rennison, senior policy advisor at IoD. “These disturbances will not cancel each other. If anything, it would compound the suffering of British companies.”