Today in Brexit, Day 3,442

Editors’ Note: MarketMinder 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. To say it has stirred headlines is an understatement. Some corners call it a big win for both sides and an economic boost for Britain. Others say it undoes Brexit, making the UK a vassal state with no perceivable benefits. In our view, all the talk misses something critical: This is 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, the emotion they inspire generally doesn’t correlate with their actual effects. As a result, it becomes 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 the UK happens to be. More often, 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 attention, 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. You may wonder why one was needed, since Brexit was settled multiple times and has already taken effect. But both sides saw room for improvement. UK Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves see the drop in UK exports to the EU post-Brexit as an opportunity to reclaim lost trade and boost GDP growth. Improving market access was a key item in the Labour Party’s election manifesto last year. Meanwhile, the deal allowing the EU temporary access to UK fishing waters was about to expire, giving European Commission President Ursula von der Leyen motivation to talk.

These talks, which lasted the better part of a year, resulted in a loose framework of a deal Monday. Both sides agreed to scrap agricultural health and safety checks, which reopens the EU’s single market to UK cheese, sausage and other delights. It also returns some EU food to the UK market, which proponents claim will help prices. UK businesses also win the privilege of bidding for EU defense contracts, and some of the red tape blocking electricity trading will go away, theoretically reducing UK energy costs—a long-running pain point. The EU also agreed to explore expediting border entry for UK passport holders, while both sides agreed to make it easier for students and young folks to work, study and travel. And as for fish, the EU wins another 12 years of reduced access to UK fisheries.

Starmer and Reeves claim this amounts to a £9 billion GDP boost, allegedly a big win. 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. 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. 

Some of these criticisms may be true, though (potential tariffs aside) 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. From here, legal eagles will write the actual text, which could take months, and then it goes to legislatures on both sides for ratification. So there remains a lot of potential for it to get sanded down or scrapped altogether. While Labour has a large majority, a lot of its seats are in areas that voted for Brexit … and constituencies where Reform, an upstart populist party led by Brexit champion Nigel Farage, cleaned house in recent local elections. Labour Members of Parliament in these areas are already speaking out against the deal, and internal opposition could grow.

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. 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) while leaving others untouched. If it even goes through.

For stocks, 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.^[i] £9 billion amounts to 0.35% of 2024 UK GDP, which is a rounding error. Or a good single month’s growth. This isn’t an economic gusher. As for trade, while 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. While 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. So are imports, which the UK gobbles up as a high-income nation. Brexit didn’t kill UK trade—it just rerouted it.

In other words, the UK doesn’t need a new EU deal to deliver some ginormous boost, because the UK economy is doing pretty nicely already. Markets are signaling as much, too, with UK stocks at all-time highs and rising in US dollars and flirting with breakeven in pounds. A deal that cuts some red tape would amount to an incremental positive on top of an already-good backdrop for markets. Nice, but markets price these things exceedingly quickly.