British Prime Minister Boris Johnson’s threat to walk away from the European Union without a trade deal has left most economists and traders unruffled for now.
After years of negotiations punctuated by ultimatums and stand-offs before the UK finally left the bloc in January, many analysts have yet to be convinced by Mr Johnson’s latest threat to tear up parts of the divorce agreement he signed only a year ago – and abandon talks.
Economists from Goldman Sachs, JP Morgan and Morgan Stanley still expect that a deal on commerce will be in place in time for the end of December.
While Mr Johnson insists that he is willing to accept economic disruption, analysts assess that such a move at a time when Britain is struggling with the Covid-19 crisis would be a risk too far for him.
“We know how the Brexit roller coaster went last year and we think that is a pretty good guide,” Stephanie Kelly, senior political economist at Standard Life Investments, said.
“It is most likely we get a deal. The incentives are all still there to get a deal.”
That scepticism is reflected in foreign exchange markets. Risk reversals, a gauge for market sentiment, show that pound investors are less bearish about the next six months than they were in 2018 and 2019, when the prospect of a no-deal departure dominated the rhetoric.
That said, the pound dropped by as much as 1 per cent against the dollar on Monday, albeit on a day when the US currency strengthened more generally against counterparts.
With sterling near $1.32, Valentin Marinov, the head of Group-of-10 foreign-exchange strategy at Credit Agricole, said the rout could extend to $1.20 if no deal emerges.
Mr Johnson has set a deadline of October 15 for a trade accord and the UK is due to leave the EU single market and customs union when a transition expires on December 31.
The move by the UK to row back on parts of the EU withdrawal agreement could hamper proceedings. The government plans to publish new legislation this week designed to dilute its legal force if outstanding issues on the thorny question of Northern Ireland cannot be resolved.
“This is Brexit brinkmanship,” said Chris Turner, ING’s head of FX strategy, who believes that there is an even chance that a deal will still be reached. “Deadlines can get extended, as we have always seen, and threats made right up to the last moment.”
Not all analysts are convinced that Mr Johnson is bluffing. Sebastien Galy, a senior macro strategist at Nordea Investment Funds, is one of the sceptics.
“We have actually been betting on a no-deal for a long time,” he said. “It is just not the type of shock you would want to have within a Covid-19 crisis. It is really unhelpful.”
In such an outcome, both sides would face costly quotas and tariffs on goods trade, and enormous levels of disruption at the border.
That could prove particularly damaging for Britain as it attempts to claw its way out of the deepest recession of any major economy in the second quarter.
Mr Johnson, who led the pro-Brexit campaign in 2016 and staked his reputation on seeing the process through, has said that a bad deal would be worse than no agreement. He believes that leaving, even without an accord, is a “good outcome” for the country.
However, Mr Johnson will still end up opting for an agreement even if it is at the last minute, according to Malcolm Barr, chief UK economist at JP Morgan.
“Having tested each other’s resolve, a late intervention by political leaders will generate a messy compromise, which provides for a ‘skinny’ deal, with both sides opting to avoid the disruption,” he wrote in a report on Monday.