Credit ratings agency Moody's expects that the European Union and the United Kingdom will successfully negotiate a looser goods trade deal, but they will be unable to agree on a “deeper and more harmonised” relationship that covers services sector.
“Given the incentives on both sides, we expect the UK and the EU to reach an agreement on a new relationship by December,” predicted Moody’s.
However, the ratings agency said "it is more likely to be a looser free trade agreement focusing on goods trade rather than a deeper and more harmonised relationship such as a customs union”.
A loose free trade agreement could allow quota-free and tariff-free trade in goods with sufficient regulatory alignment between the EU and the UK but it would “structurally weaken the UK’s economy”, said Colin Ellis, Moody’s managing director.
“Weaker macroeconomic conditions arising from the shift to a free trade agreement will have indirect negative effects on the UK sovereign and related issuers, as well as insurers, ports and banks,” he said.
After leaving the EU on Friday, the UK will enter a transition period with the EU until the end of the year. During these 11 months, existing EU rules and regulations will continue to apply to the UK. However, at the same time, the UK can also negotiate new trade deals with other countries.
The prospect of the transition period expiring at the end of the year without both sides agreeing on a new relationship, a so-called no-deal outcome, is not Moody’s base case scenario but it remains a realistic possibility, according to the New York-based agency.
It also noted that the UK's withdrawal from the EU will have no impact on the bloc's budget in the short-term because the UK is committed to its 2020 budget and existing programmes under the terms of the Withdrawal Agreement.
“Even if the UK and the EU fail to reach a trade deal by the end of 2020, or later if the transition period is extended, the EU's credit profile will be resilient to the impact,” said Steffen Dyck, senior credit officer at Moody’s Investor Service.
More than three years after the 2016 Brexit referendum, the UK will finally leave the EU at 11pm local time on Friday.
The past 1,317 days have seen almost every twist and turn imaginable as the country grappled deep division and political and legal wranglings to reach this stage.
While the first phase of Brexit is coming to a conclusion, the “complicated second phase is just beginning”, according to the Bank of Singapore.
“Britain must negotiate a trade deal governing future commercial relations with the EU,” said Sim Moh Siong, currency strategist, at the Bank of Singapore.
“The negotiations will be both complicated and limited, given the timing. The transition period, during which little changes despite the formal Brexit, runs only until end 2020,” he added.
Industry analysts say transition period after Brexit will be a crucial phase that will decide UK’s future economic prowess.
“After Brexit, the UK will embark on another tricky and equally fatiguing process of trying to transition away from the EU with a comprehensive free trade agreement that minimises the economic damage of Brexit,” said Bethel Loh a strategist with ThinkMarkets.