A new deal between the European Union and the United Kingdom might help the country restore its healthy fundamentals through improved relations with Brussels. The European Commission President and the UK prime minister announced a new agreement on Monday of the Windsor Framework. Overall, the agreement aims to resolve issues in the controversial Northern Ireland protocol. The protocol is a bugbear for pro-Brexit parties in the region.
It has subjected devolved Northern Ireland to a standstill for over a year after the DUP (Democratic Unionist Party) resigned in protest. Right now, the new Brexit deal faces mixed reactions as it looks towards passing through the UK parliament. Meanwhile, the Democratic Unionist Party will weigh the new deal against its seven tests. While the DUP might make it hard for the agreement, the prime minister's friendly approach will likely improve UK and EU relations.
The new Brexit deal removes the trade war risk between Britain and its top market. In general, the trade war has remained an ever-present threat to the combative approach from previous prime ministers. This new deal will likely boost investor confidence and unlock business investments that have remained closed since the Brexit trade dispute. The UK has suffered lasting impacts from increasing trade barriers with the EU that have limited its growth potential.
Most importantly, the end of the conflict will restart UK's healthy fundamentals like well-regulated markets, cash-flush firms & households, and capitalized banks. Experts are still predicting an above-consensus GDP for Britain, seeing a 1.7% growth in 2025, a 1.6% rebound in 2024, and a 0.8% contraction in 2023. The UK GDP dropped by 0.5% through December 2022 as the UK economy flattened throughout the final quarter to avoid a recession.
Nonetheless, the tightening monetary policy and the soaring cost of living result in persistent challenges to economic growth. The Bank of England has announced that the UK economy might have fallen into a shallow recession in the 2023 first quarter. A Brexit deal of this nature would substantially impact the financial markets several years ago. The sterling rose slightly after the announcement. But historical standards muted the overall reaction to the currency and stock markets.
Experts believe that despite the political significance of the new Brexit deal, it would not impact the market prices immediately. In other words, traders also have other priorities. Northern Ireland is among the smallest populations in the EU region and has a small GDP too. Therefore, it will not change the macroeconomic forecast and factors like inflation instantly. But the deal would kick-start a long-term impact on the market. Above all, it can open up ways for incremental trading improvements.
