UK: The softer Brexit bodes well for the sterling

5 min
Ana Boata
Ana Boata Senior Economist for Europe

The Softer Brexit targeted by the UK government, still to be negotiated with the EU, sets the pace for a lower deterioration in economic prospects. Overall, UK GDP growth would decelerate only moderately, to +0.8% in 2021 from +1.3% in 2019 as the regime change would be less dramatic than in a ‘Limited FTA’ scenario that we were previously expecting. The UK government White Paper confirmed that the future agreement with the EU to be implemented in 2021 targets a free trade zone for goods but not for services. We would expect non-tariff barriers (licensing, administrative costs etc.) to represent additional costs of 10%. The financial services would lose passporting rights but gain market access based on regulatory equivalence with the EU. While UK regulation will be different from the one in the EU, both sides will work together to align in order to avoid withdrawal. If PM May’s proposal is accepted without any major political turmoil, we expect the GBP will appreciate against the EUR.