On This Week’s Brexit Reset

Editors’ Note: MarketMinder Europe prefers no politician nor any party. We assess developments for their economic and market implications only.

The UK is evidently in a dealmaking mood this month, following its trade deal with India and non-deal deal with the US with a fresh pact with the EU Monday.^[i] To say it has stirred headlines in publications we follow is an understatement. We have seen some call it a big win for both sides and an economic boost for Britain. Others have said it undoes Brexit, making the UK a vassal state with no perceivable benefits. In our view, all the talk misses something critical: This appears to be another non-deal deal and may not amount to much. Its market significance, to us, looks minimal.

When it comes to political developments like this, experience tells us the emotions they tend to inspire generally doesn’t correlate with their actual effects. As a result, we find it can become difficult—and paramount—for investors to cut through the clutter and determine what is actually changing in terms of economic policy and how relevant it is for businesses’ ability to take risk, invest and profit. In our experience, rare is the sweeping policy change that is an unalloyed good with minimal negative side effects, especially in developed economies that are already pretty competitive internationally—which we think the UK happens to be. More often, according to our research, changes tend to create winners and losers, which can increase businesses’ risk aversion. Therefore, we find markets are happiest when a deal’s actual size and scope don’t match the widespread perception, especially if the attention isn’t universally positive. To us, that indicates a bullish gap between reality and expectations.

Positively, we think this is the case for the UK’s new agreement with the EU, which is a loose framework.^[ii] Both sides agreed to scrap agricultural health and safety checks, which reopens the EU’s single market to UK cheese, sausage and other delights.^[iii] It also returns some EU food to the UK market, which proponents claim will help prices.^[iv] UK businesses also win the privilege of bidding for EU defence contracts, and some of the regulation blocking electricity trading will go away, theoretically reducing UK energy costs.^[v] The EU also agreed to explore expediting border entry for UK passport holders, whilst both sides agreed to make it easier for students and young folks to work, study and travel.^[vi] And in return, the EU wins another 12 years of reduced access to UK fisheries.^[vii]

Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves claim this amounts to a £9 billion gross domestic product (GDP, a government-produced measure of output) boost, allegedly a big win.^[viii] Leading figures in the opposition Conservative and Reform Parties, including ex-Prime Minister Boris Johnson, call it a sellout, noting the UK will likely resume paying into the EU’s coffers under the student travel agreement.^[ix] They also state the agreement makes the UK subject to EU agrifood policy and emissions trading rules without giving the UK influence or a vote. And they decried what looks to be a poison pill in the deal, hitting the UK with tariffs if future governments try to rip up the fishing agreement.^[x] 

Some of these criticisms may be true, though (potential tariffs aside) our research suggests they are outside the scope of things markets care about. Starmer and Reeves’ estimate of the economic benefits may also be true. But it is impossible to know now, as details are scant and this is all subject to change. Like the UK’s trade deal with the US, it is a political agreement and not binding.^[xi] From here, legal experts will write the actual text, which could take months, and then it goes to legislatures on both sides for ratification. So, in our view, there remains a lot of potential for it to get sanded down or scrapped altogether. Whilst Labour has a large majority, a lot of its seats are in areas that voted for Brexit … and constituencies where Reform won big in local elections earlier this month.^[xii] Labour MPs in these areas are already speaking out against the deal, and internal opposition could grow.^[xiii]

Therefore, we wouldn’t pencil in what either side is saying—not the £9 billion boost or the they undid Brexit handwringing. In our view, this deal is perhaps most notable for what it doesn’t do. It doesn’t address pharmaceutical regulation and trade, which got more complicated after Brexit, frustrating both sides.^[xiv] Nor does it address dual regulations for many household products and veterinary medicines. Businesses will still face customs checks—trade friction isn’t really dropping. This isn’t a free-trade deal. It just addresses some gripes (cheese and sausage) whilst leaving others untouched. If it even goes through.

For stocks, we think this largely seems like a non-event no matter how it goes. A £9 billion GDP boost sounds nice until you consider that UK GDP topped £2.5 trillion last year.^[xv] £9 billion amounts to 0.35% of 2024 UK GDP, which is a rounding error.^[xvi] Or a good single month’s growth.^[xvii] This isn’t an economic gusher, in our view. As for trade, whilst UK trade with the EU is down since Brexit took effect in January 2020, trade with the rest of the world has increased more than enough to offset it.^[xviii] Whilst we think it is impossible to disentangle Brexit and COVID’s responsibility for dreary full-year UK exports in 2020 and 2021, annual UK exports are now above 2019’s tally.^[xix] So are imports, which the UK gobbles up as a high-income nation.^[xx] Brexit didn’t kill UK trade, in our view—it just rerouted it.

In other words, we don’t think the UK needs a new EU deal to deliver some huge economic boost, because the UK economy is doing pretty nicely already. Markets seem to be signalling as much, too, with UK stocks flirting with breakeven since April’s tariff-related correction.^[xxi] In our view, a deal that cuts some regulation would amount to an incremental positive on top of an already-good backdrop for markets. Nice, but our research finds markets price these things exceedingly quickly.