Beyond Brexit: what happens after 31 January 2020?

The 31 January will be a watershed in UK history. There will be little obvious change in the weeks and months ahead, however.

This is because an agreed "transition period" means that existing trade agreements and regulations will remain in place until the end of 2020.

In the meantime, the UK and EU must reach new agreements on a wide range of critical issues, including trade, security and freedom of movement. We expect both sides to adopt a tough approach to negotiations.

This could well give rise to concern about a new cliff edge at year end. On balance, however, we think the UK and Brussels will probably reach a limited agreement that avoids significant economic disruption, while deferring some issues until next year.

UK economy

Although not our base case, it is possible the UK economy enters a technical recession early in 2020. Businesses are sitting on significant inventory, built up in late 2019 when a no-deal Brexit was a real threat. Firms may now opt to draw down this inventory rather than invest in new production, keeping a lid on growth. 

In the medium term, greater clarity should lead to some increase in business investment. There are also signs of greater confidence, such as the survey of UK Chief Financial Officers, which signalled significantly increased optimism following last year's election.  

We continue to expect modest UK GDP growth of around 1% for 2020 as a whole.  

Bank of England ("BoE") on hold for now

The BoE's January meeting was also a watershed of sorts; it was the last meeting overseen by governor Mark Carney. His successor, Andrew Bailey, will be in office for the next monetary policy meeting in late March. 

The BoE left interest rates on hold at 0.75% - the right decision, in our view.  

However, the UK central bank is far from optimistic on the outlook. It cut its growth forecast for this year and next. It also thinks inflation will remain below forecast. 

Still, given our assumption of a gradual recovery in activity this year, supported by increased government spending in the March budget, we expect the BoE to remain on hold in 2020. 

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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