The forecasts for 2020 suggest another lacklustre year in store for the British economy.
The median prediction for GDP growth, according to the latest survey of independent forecasters compiled by HM Treasury, is just 1%. That would be the weakest annual figure since the recession of 2008-09. In particular, investment is expected to remain sluggish, largely because of persistent Brexit uncertainty. The good news is that the consensus is usually wrong, and, in this case, it already looks too pessimistic.
Let’s focus on Brexit (although there are other reasons to be optimistic, including an easing in political uncertainty more generally, and signs of an improvement in the global backdrop).
Many commentators are still sniffy about the Tory election pledge to ‘Get Brexit Done’. They argue that the official departure from the EU on 31st January is only one small step in a potentially lengthy and difficult process. This process will include the first serious negotiations about the future relationship, and a ‘transition period’, lasting until the end of 2020, when not much will actually change.
There are indeed still plenty of ways that Brexit could play out, with different implications for the economy. The UK government’s ambitious aim is to conclude a comprehensive free trade agreement with the EU this year, covering all major sectors and, crucially, which allows for some future regulatory divergence. For now, at least, the EU is dead set against this, preferring to prioritise some sectors (for example, fisheries before financial services), and insisting on full regulatory harmonisation as part of the price for unfettered market access.
The timetable is challenging too. Realistically, most of the groundwork will need to be completed in the first six months, with everything sorted by October or November. Indeed, new Commission President Ursula von der Leyen has already claimed that it is “basically impossible” to negotiate a full future-relationship deal and have it ratified by the end of 2020.
Brexit pessimists have therefore focused on what could still go wrong. If a substantial deal can’t be done in time, there are three main alternatives.
One is that the talks break down and the transition period concludes at the end of 2020 without a new UK-EU trade agreement. This wouldn’t quite be ‘no deal’. Some important aspects of the Withdrawal Agreement, such as the special arrangements for Northern Ireland, would presumably remain in place.
There could also be new ‘bare bones’ provisions covering other essential areas too, such as security cooperation and rules to keep planes flying. But this first scenario would mean new tariffs and non-tariff barriers, albeit with some important benefits too from a cleaner break from the EU.
A second scenario is what Ivan Rogers has described as a “quick and dirty tariff- and quota-free deal, involving stringent level playing field conditions and an agreement on fisheries next year, deferring other issues until later”. In other words, a temporary deal very much on the EU’s terms.
The third alternative (not much different from the second) would be to find some way to extend the transition period beyond the end of 2020, effectively keeping the UK in the Single Market and EU’s Customs Union, even though Parliament has now passed legislation that rules this out.
This all suggests that Brexit uncertainty will remain high, and continue to weigh heavily on investment for some time yet. But I think there are three reasons to be much more optimistic.
First, the EU is likely to give some more ground. Brexit pessimists often assume that the EU holds all the cards, but it is clearly in the economic interests of both sides to do a deal. What’s more, the EU’s opening position is unreasonable. Rather than full harmonisation, most global trade agreements allow for some divergence based on well-established principles such as mutual recognition or equivalence, as long as basic standards are met and common objectives achieved. In practice, the UK will surely continue to exceed these standards.