Prospects for a Brexit deal between the EU and the UK have significantly risen over the past few days, but a technical extension until early 2020 is still likely in our view. A deal should lower the uncertainty both in the UK (-0.3pp of real GDP growth per year since 2018), and should progressively help the UK return to “business as usual”. We expect the rise in business confidence to boost domestic investment, which contracted over the past two years. Foreign investment should also gain momentum. Labor shortages should reduce and support corporates’ margins. However, the unwinding of contingency stockpiling will shave off -1.5pp from real GDP growth over the next two quarters. Hence, we expect GDP to fall by -0.1% q/q in Q4 2019 and Q1 2020. A recovery is expected thereafter, with growth reaching +0.6% q/q on average in H2 2020. For the EU, the cost of uncertainty (-0.2pp of real GDP growth per year) will slowly fade away but we expect a negative base effect on Eurozone exports due to frontloading of imports from the UK (-EUR2bn in the coming six months).
