Berenberg Paying Slightly More Attention To Negative Brexit Tail Risks

Berenberg note that "ever since the UK voted to leave the EU in June 2016, commenters have frequently warned about a potential collapse in talks. Despite a few close calls, this hasn't happened, yet. During the Brexit negotiations, the UK regularly talked tough but, ultimately, made the necessary concessions to strike a deal - mostly notably when Johnson agreed to keep Northern Ireland de facto in the single market in November 2019. Things might be different now, however. Johnson is under pressure from his party over the badly managed pandemic. The influential Brexit hardliners in his party favour the hardest exit possible. Johnson may thus be inclined to do what suits his own political interests best rather than what is good for the UK overall. The (weekend) developments skew the risks away from a full or partial deal (35% chance) towards a hard exit. While our base case remains a semi-managed hard exit (60% probability) which involves some modest stopgap measures to manage the transition from EU to WTO rules for trade, the rising tensions could limit the breadth of any such measures. More than before, we have to watch the tail risk (5%) of a disorderly hard exit at the end of the year. A hard exit with few or no intermediate steps to manage the adjustment in key areas like goods trade and financial services could tip the UK back into recession in early 2021 and temporarily slow the EU recovery."