Perspectives

Brexit update

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EcoPerspectives // 4 quarter 2019  
economic-research.bnpparibas.com  
United Kingdom  
Brexit update  
As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK  
is heading? Probably not the Prime Minister himself, Boris Johnson, who lost his majority in the House of Commons in an attempt to  
suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the  
Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been  
prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general  
election.  
It is now more than three years since the UK voted in a referendum  
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- Growth and inflation  
GDP Growth (%)  
to leave the European Union (EU). And yet, no one knows the  
direction in which the country is heading. A withdrawal agreement is  
on the table, but this has been rejected on three occasions by the  
House of Commons, so it would be quite some feat to get it ratified  
by 31 October 2019 (the next deadline). In a last attempt to find  
support at Westminster, Prime Minister Boris Johnson proposed to  
remove the backstop for Northern Ireland that was intended to  
prevent the return of hard border with the Republic of Ireland, while  
maintaining the integrity of the single market.  
Inflation (%)  
Forecast  
Forecast  
2
.7  
2.5  
1
.9  
1.9  
1.9  
1
.8  
1
.4  
1
.1  
0
.6  
0.6  
But his offer to the twenty-seven other EU member states (the 27) is  
unlikely to find favour either for its form (it has been presented as a  
‘take it or leave it’ offer) or for its contents. Thin on detail, legally and  
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operationally questionable, Boris Johnson’s alternative to the  
backstop suggests that the two Irelands could remain in a common  
regulatory zone, whilst belonging to two different customs unions  
Source: National statistics, BNP Paribas  
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- The economic cost of a no-deal Brexit…  
(
British and European) and that all this could be achieved without  
... on GDP (deviation from baseline)  
re-introducing border checks. At the time of writing, the European  
Parliament and the President of the Council, Donald Tusk, have  
given these proposals a pretty frosty reception.  
UK  Euro zone  
020  
2
2021  
2022  
0%  
In the unlikely case Boris Johnson reaches a new deal with the 27,  
he would have the greatest difficulty in ratifying it, having lost his  
majority in a House of Commons he tried to suspend . This would  
leave the end-point either as a ‘no deal’, although this has been  
prohibited by a recent change in the law, or the more likely, but by  
no means guaranteed, outcome of a new delay accompanied by an  
early general election.  
-
1%  
2%  
1
-
-3%  
on production in certain sectors of UK economy  
Deviation from baseline (long-term effect)  
Deal or no deal…  
Whilst negotiating a withdrawal agreement (WA), the 27 have been  
actively preparing for the possibility of a no-deal exit. To do so, the  
Council and Parliament have adopted a series of contingency  
measures covering areas as varied as fisheries, data transfers,  
citizens’ rights, transports, chemicals or medicines. Most of the  
proposed solutions are temporary and subject to reciprocity from the  
UK (see Box 3); the European Commission has also indicated that  
they will in no way replace the EU’s rules and preferences, which  
will cease to apply to the UK on its departure date. The aim is to  
soften, as far as possible, the impacts of no deal, which nearly all  
economic actorswith UK businesses topping the listbelieve to  
be both negative and inevitable.  
Transport equipment  
Metals  
Machinery & equipment  
Chemicals  
Electronic equipment  
Materials manufacturing  
Agri-food  
-
24% -18% -12%  
-6%  
0%  
Source: OECD  
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In a study published recently , the Organisation for Economic  
Cooperation and Development put the loss in UK’s production  
following a no-deal at nearly 3 points of GDP by 2022. The National  
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The suspension was overturned by the Supreme Court on 24 September 2019.  
See OECD (2019), Interim Economic Outlook, September.  
th  
22  
EcoPerspectives // 4 quarter 2019  
economic-research.bnpparibas.com  
Institute of Economic and Social Research (NIESR) puts the figure  
at 5 points. This is only an average. Given the UK’s role in  
European value chains, the losses would be particularly severe in  
several highly integrated sectors, like automotive and aerospace  
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- Some examples of contingency measures adopted by the  
EU in the event of a no-deal Brexit  
Citizens  
(
Chart 2).  
On the withdrawal date, UK citizens will be considered as citizens of  
a non-member third country, without preferential treatment, implying  
enhanced border controls, passport and visa requirements and  
residence permits to travel and work in the EU, the withdrawal of  
mutual recognition of professional qualifications and of the automatic  
portability of social security rights, etc.  
Whilst not negligible, the shock would be more bearable for the euro  
zone (a 0.6 pp loss in GDP after three year, five-times less than in  
the UK). Clearly, the picture would be very mixed from one country  
to the next, with Ireland, for instance, seeing an impact on growth  
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eight times greater than that in Spain . As a result, the support  
On condition of reciprocity, the contingency measures aim to  
guarantee UK citizens and their families resident in the EU prior to  
the withdrawal date the right to remain legally for a transitional period  
measures already include provisions to redirect EU resources (such  
as from the European Maritime and Fisheries Fund for example)  
towards the worst-affected sectors and regions.  
(
12 months in France) during which time they can apply for  
A no-deal Brexit represents a leap into the unknown and no one can  
claim to be able to predict its exact consequences. Econometric  
analysis therefore plays only an indicative role. One of its merits,  
though, is that it shows that the process will end poorly for pretty  
much everyone; there will be no winners, only different types of  
loser. In the run-up to 31 October reason rather than desire is likely  
to push UK and EU leaders to agree a fresh extension (the third)  
prior to finally separating… or not. The UK could well hold an early  
general election, and at the moment the polls are showing a lead for  
Boris Johnson’s Conservative Party.  
permanent residence; they also seek to guarantee social rights  
acquired in the UK prior to the date of withdrawal, as well as equality  
of treatment in access to health care and the assimilation and  
aggregation of pension rights, etc.  
Customs  
On the withdrawal date, customs formalities and duties would apply  
immediately (declarations, VAT payments, possible guarantee  
requirements, etc.). Prohibitions or restrictions might apply. Import  
and export licences would be required, whilst Authorised Economic  
Operator (AEO) certifications granted by the UK would no longer be  
valid in the EU.  
… the damage is done  
The contingency measures seek, as much as possible, to prevent  
blockages at borders and/or disruption to supplies: increased border  
post resources (both human and infrastructure), the temporary,  
conditional extension of the validity of checks and approvals for  
marketability carried out by the UK for certain products (medicines,  
veterinary products, etc.). In addition, nearly one hundred  
‘preparatory notices’ have been issued to businesses to help guide  
them through the administrative and regulatory processes, adapt  
contracts, relocate facilities, restructure sites and so forth.  
Whatever the final outcome, the Brexit saga has already caused  
significant damage to the UK economy, which will be hard to repair.  
The transfers to continental Europe of the European Banking  
Authority, the European Medicines Agency, the security centre for  
the Galileo GPS system, or simply the subsidiaries and  
headquarters of groups seeking to secure access to the single  
market are all probably one-way moves. For the first time since the  
financial crisis of 2008, the UK’s balance of payments has shown a  
chronic net outflow of foreign direct investment.  
Air travel  
Economic conditions in the UK are deteriorating. Business surveys  
remained weak throughout the summer and GDP contracted in the  
second quarter. At 49.3 in September, the Purchasing Managers  
Index is at its lowest for ten years, apart from its brief collapse in  
July 2016 after the Leave victory in the referendum.  
On the withdrawal date, EU rules governing air travel services within  
the EU will no longer apply to the UK, resulting in the UK’s loss of  
access rights for flights to EU destinations and for all flights (internal  
or international) operated within the EU or between the EU and a  
third country.  
On condition of reciprocity the contingency measures aim to ensure  
basic air connectivity (maintaining services between the UK and the  
27) for a short period of time, until 30 March 2020. After that date,  
carriers based in the UK will have to conform to EU requirements,  
notably in terms of ownership and control, in order to operate within  
the EU.  
Source: European Commission  
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See Insee (2019), Assessing the impact of Brexit on the economic activity of  
the UK's closest partners: the trade channel, Conjoncture in France, March  
2019.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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