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Schroders Warns U.K. May Have No Post-Brexit Trade Deal

The U.K. fund manager says the odds of leaving the trading bloc without a trade deal are “sufficiently high to worry.”

  • Joe McGrath

Contrasting priorities between negotiators handling Britain’s departure from the European Union mean the odds of having no trade deal in place at the end of the two-year negotiating period are “sufficiently high to worry,” according to Schroders.

The warning comes as U.K. Prime Minister Theresa May is poised to begin proceedings to leave the European Union by invoking the Article 50 break clause — the point at which the parties have two years to agree to the terms of the U.K.’s departure. The Prime Minister is expected to trigger the clause on March 29.

A failure by U.K. negotiators to secure a trade deal with their EU counterparts during the divorce period starting this week would risk “damaging” economic consequences and making a long-term deal much more difficult, the company warned.

In a media conference call, Schroders’s senior European economist and strategist Azad Zangana warned that the European Union will likely prioritize EU citizens’ rights, the U.K.’s obligations to fund existing projects, and customs and security arrangements; the U.K., however, has the greatest appetite for a new trade deal.

“The odds of a hard Brexit [the unilateral withdrawal of the U.K. from the EU without any agreement] are sufficiently high to worry,” Zangana explained. “There will have to be a broad framework agreed for the future trade relationship, but it will not be a trade deal. The EU wants to have the exit bill agreed before it has a trade deal put in place. Instead, a transition agreement is quite likely between both sides. This may last four or five years, and it will likely be a step from ‘full and free’ access.”

Under the terms of Article 50, it is easier to get approval for a trade deal, according to Zangana, who says that only 15 member states need to agree to the terms.

The Schroders economist stressed the significance of the two-year time frame, because once negotiations reach the Article 50 deadline, all agreements have to be done on a unanimous vote.

“If no agreement is made or they run out of time, we could find ourselves in a ‘hard Brexit’ situation,” Zangana said on the call. “We believe it could be damaging. The WTO would put larger tariffs on. They wouldn’t cover services. I think it would also lead to a poor outcome for future U.K./EU relations on security and other elements.”

The triggering of Article 50 would also mark the moment that economists start to measure the real impact of Brexit. Sterling has depreciated since the U.K.’s vote to leave the European Union in June 2016. At the end of May 2016, sterling was at 1.44 against the U.S. dollar. On March 28, 2017, this stood at 1.25.

In the U.K., higher import prices have only just started to feed through to domestic inflation, but global investors have spotted an opportunity in the U.K.’s commercial property market as the currency has weakened.

A report released today by real estate investment management firm Jones Lang LaSalle predicts increased overseas investment in the U.K. commercial real estate market after the country has left the European Union as a result of a sustained period of weaker sterling. In 2016 Asian investors — notably the Chinese — poured an additional £1.1 billion ($1.4 billion) into the U.K. commercial property market, compared with the previous 12-month period, and analysts at JLL believe this will continue throughout 2017.

Alistair Meadows, head of U.K. capital markets for JLL, explains, “Chinese investors now rank just behind the U.S. as the second-largest source of global cross-border capital, and we expect them to have an increasing influence on the U.K. market. Currency movements have bolstered the case for investment in the short term, but long-term trends are toward a rising share of investment in the U.K., irrespective of these movements.”