UK pact with the EU may help restore investor confidence, says economist

The new trade agreement between the UK and EU represents a “material evolution” in the economic relationship between the two sides but stops short of any fundamental realignment, according to Panmure Liberum chief economist Simon French.

The most significant development in the agreement is the dynamic alignment on sanitary and phytosanitary (SPS) standards, which will reduce certification and border checks on food and animal exports to the EU.

French noted that the UK’s exports of food and animal produce to the EU are around ten times larger than its fishing industry, making the SPS alignment “a good deal, in aggregate, for the UK.”

The quid pro quo for this SPS easing is a 12-year extension of EU fishing rights in UK waters. While politically sensitive, French argues the economic logic is clear, with over £10 billion in annual agri-food exports still flowing to the EU despite Brexit-related trade friction.

Panmure Liberum estimates the economic benefit of the new agreement at £9 billion per year, approximately twice the value attributed to the UK’s recent trade deal with India.

However, French emphasised that the most material benefit may lie in signalling a more pragmatic and less dogmatic approach to the UK’s largest trading partner.

“Yesterday’s UK-EU agreement is a material evolution and so needs to be contextualized using the economic and market data that documents the last nine years since the Brexit referendum,” he said.

French pointed to persistent signs of UK economic underperformance since the Brexit vote: UK-listed equities continue to trade at a discount to European peers; per capita GDP and business investment have lagged behind other developed economies; UK private sector output has grown just 7% since 2016, compared with a 22% increase in the government sector.

Other measures in the agreement include cooperation on youth mobility, defence procurement, and energy trading, while an alignment with the EU’s carbon trading system could reduce friction, French warned it might constrain the UK’s ability to shape an independent industrial policy for carbon-intensive sectors.

The agreement, while not a new trade deal or re-entry into the Single Market, reflects a less confrontational stance that may help restore investor confidence, he says. 

“Sentiment matters,” French concluded, suggesting that a shift in tone could deliver upside beyond the government’s estimated £9 billion in additional output.