2020 will be a pivotal year for the UK as it moves on to the next phase where it will initiate trade negotiations with the European Union. UK-focused investors are mindful that the UK as an economy underwent significant underinvestment in the last three years. This negatively impacted the real economy as economic activity softened during the period hitting the UK’s economic performance.

Despite the fact that Brexit has come into effect on 31st January, risks remain heightened for the UK for it to strike an advantageous deal with the EU. The free trade bloc giving access to the European market is a lucrative proposition for UK companies. The UK government spearheaded by Boris Johnson must ensure that the UK negotiates a trade deal that gives access to c. 400mn people.

The recent rhetoric heeded by Boris Johnson was combative and confrontational towards the EU. His attitude and speech in relation to the EU was described to be similar to Trump’s style of negotiating with both China and the EU. However, there is a stark difference in economic dominance. On one hand, Trump represents the largest most dominant economy, the United States, and on the other hand Boris Johnson represents an economy which is frail, weak and far lower in the pecking order on the global stage.

Boris Johnson sought to liken the UK’s situation with that of Canada. Indeed, should the EU refrain from offering such a solution, the UK will resort to the Withdrawal Agreement. On the other side of the table, Michel Barnier described it as an “ambitious” trade deal. The current EU-Canada deal eliminates import tariffs but there are still custom and VAT checks. More importantly, the UK’s banking services will be hit harder as in the Canada-EU deal, the flow of services is restricted. Boris Johnson is also considering seeking resolution at the World Trade Organisation if EU chiefs refuse to sign a similar deal to Canada.

Market participants sought the speech by the Prime Minister as setting the tone for the negotiations. Following the speech by Boris Johnson, the pound fell sharply by over one per cent as the 11-month period is seen to be a short period to settle most of the hurdles that the negotiations will face. The UK needs the deal more than the EU does, and that puts the UK in a vulnerable position in the negotiation table. Investors and the business community hope that sane heads prevail and negotiations will evolve in a mutually beneficial/respectful way.

The UK and the EU have to co-exist as both parties represent opportunities for each other. The upcoming transitional period will be a test for the UK’s Prime Minister, as economic consequences loom on any decision that will be taken from their end. The Bank of England’s status quo has meant that businesses are not getting any monetary relief, whilst the next month’s Budget will be probably postponed following the resignation of Sajid Javid. The new chancellor, Rishi Sunak will be the person delivering the next budget with an expected stronger fiscal stimulus in line with Boris Johnson’s electoral pledge. 

This article was issued by Jesmar Halliday, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.