UK heading for 'fairly hard' Brexit if Boris Johnson deal passes

British Prime Minister Boris Johnson shakes hands with European Commission President Jean-Claude Juncker during a press point at EU headquarters in Brussels, Thursday, Oct. 17, 2019. Britain and the European Union reached a new tentative Brexit deal on Thursday, hoping to finally escape the acrimony, divisions and frustration of their three-year divorce battle. (AP Photo/Francisco Seco)

British Prime Minister Boris Johnson shakes hands with European Commission President Jean-Claude Juncker during a press point at EU headquarters in Brussels, Thursday, Oct. 17, 2019. Britain and the European Union reached a new tentative Brexit deal on Thursday, hoping to finally escape the acrimony, divisions and frustration of their three-year divorce battle. (AP Photo/Francisco Seco)

Published Oct 17, 2019

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LONDON - Britain will be on course for

more distant economic ties with the European Union, making the

country poorer, if Prime Minister Boris Johnson wins

parliamentary backing for the Brexit deal he clinched with

Brussels on Thursday.

Compared with the deal his predecessor Theresa May reached

last year - which parliament rejected three times - Johnson's

deal aims for less regulatory alignment with the EU, and greater

trade barriers between Britain and its largest trading partner.

Johnson now faces a fight to convince parliament, where his

Conservative Party lacks a majority, to approve the deal in a

vote due to take place on Saturday.

"Even if Boris Johnson does manage to close the deal,

investor celebration of this might soon be dampened by the

recognition that this is a fairly hard Brexit," said Paul

O'Connor, a fund manager at Janus Henderson.

Britain's finance ministry and almost all external

economists have forecast that increased trade barriers will

cause the British economy to grow more slowly than if it were to

stay in the EU, and the damage increases as trade barriers rise.

Based on what was known of Johnson's plans last week, UK in

a Changing Europe estimated that they would make Britons more

than 6% poorer on a per capita basis than staying in the EU -

equivalent to 2,000 pounds (R38 060) per year in the medium term.

May's deal would have reduced income by just under 5% per

head, while a so-called no-deal Brexit - which would leave

Britain trading purely on World Trade Organization terms - would

lower incomes by just over 8%.

"This is more damaging than Theresa May's Brexit in terms of

economic impact," said Anand Menon, UK in a Changing Europe's

director.

Menon said he did not think these estimates needed to be

changed significantly, based on the final deal reached on

Thursday. He expected Johnson to push back against the 'level

playing field' requirements on regulatory alignment that the EU

wants to be a condition for a close future trading relationship.

By contrast, the opposition Labour Party has said it would

seek a closer trading relationship with more alignment with EU

rules on the environment and worker protections if it was in

charge of talks after Britain left the EU.

If Britain leaves the EU on Oct. 31, as scheduled, Johnson's

agreement ensures a transition period lasting until at least the

end of 2020 during which there will be no big economic change.

This period can be extended until the end of 2022, while

Britain and the EU negotiate a new trade arrangement with fewer

shared rules and new restrictions on cross-border trade in goods

and services.

FINANCIAL MARKETS

Financial markets have reacted positively to the deal, as it

lowers the risk of a disruptive no-deal Brexit.

But Dean Turner, an economist with UBS Wealth Management,

said that although it might give a brief fillip to British

growth, there was too much uncertainty about the longer-term

trading environment to revive moribund business investment.

"I wouldn't be getting the flags out just yet," he said. "I

think we will see a little bump in activity, but not anything

that will be meaningful enough to get the UK out of a weak

growth trend."

The Centre for European Reform estimated that Britain's

economy was already nearly 3% smaller than it would have been if

it had voted to stay in the EU in June 2016's referendum.

While the bulk of the Johnson deal was seen as largely the

same as that agreed between the EU and May, analysts noted that

May's aspirations for a close future trading arrangement had

been watered down in the political declaration accompanying it.

Whereas the May version aspired to "as close as possible" a

future trading relationship with the EU, that line was replaced

by merely "ambitious" in the revised text.

"Theresa May's deal would have ended up in a softer

arrangement than just a free trade agreement," Alex Stojanovic

of the Institute for Government said.

"This government appears to want an FTA and that is very

different: that means there would still be regulatory barriers

particularly in goods between Great Britain and the EU."

Rachel Kent, a financial services lawyer at Hogan Lovells,

said the original political declaration already tied regulatory

alignment to market access in a future UK trade deal with the

EU, Britain's biggest financial services customer.

But the revision made this more explicit, she said. British

regulators have said they do not want to become 'rule takers'

rather than rulemakers after Brexit, increasing the chance of

divergence and barriers between British and EU financial

services markets.

Stojanovic added that Britain's new freedom to sign its own

bilateral trade deals around the world was unlikely to offset

the lost economic activity.

"If the UK did a deal with everybody ... it would benefit in

15 years the UK GDP by 0.2%. Most free trade agreements do not

benefit GDP very much."

REUTERS

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