Last minute Brexit deal merely avoids the worst

Highlights:

• With the last-minute Christmas Eve agreement, the implementation of tariffs for EU-UK trade has been avoided and we have no doubt that it will finally be confirmed also by the EP. Financial markets took the Brexit agreement with relief.
• The agreement covers goods trade, fisheries, defines a level playing field and contains a dispute settlement mechanism. It thereby finishes the long period of fundamental uncertainty regarding the EU-UK relations.
• That said, trade in services is not covered and new impediments to trade will emerge due to regulatory requirements and bureaucracy. As a result, trade growth will be hampered relative to the pre-Brexit period thereby constituting headwinds to growth.
• All in all, barring major negative surprises on implementation the envisaged effects from the new EU-UK relations are broadly in line with our expectations. This leaves the development of the pandemic and of lockdown measures as the major growth risk for 2021. Financial markets should be supported by the significant reduction of uncertainty on the EU-UK trade relations.