The EU-UK trade talks have made very little progress over the first half of the year.
The trade negotiations have been fractious, with neither side prepared to give any ground.
This has been one of the factors behind the renewed weakening of sterling, with the euro climbing above the 91p level recently from 84p earlier in the year.
The UK has ruled out any extension to the Brexit transition period beyond the end of 2020 that would allow the negotiations to be prolonged into next year.
Thus, markets have been concerned that we could be heading for another cliff-edge Brexit date in December, with a growing risk that a trade deal will not be agreed, effectively triggering a hard Brexit at the start of 2021.
More recently, though, there has been some signs of movement on both sides.
Meetings this month between the British prime minister and a number of EU leaders would appear to have added fresh impetus to the talks.
“Intensified”, negotiations that will include some face-to-face meetings, have commenced and are set to continue during July, before hopefully resuming in September.
A trade deal would need to be finalised by October to allow sufficient time to have it ratified by the end of the year and take effect from January 1 2021.
The issue of regulatory alignment and a level playing field on trade has been a major stumbling block in the negotiations.
There have been signals from the EU recently that it could be prepared to soften its stance on this, especially regarding state-aid rules.
Meanwhile, the UK may be prepared to accept some form of common minimum regulatory standards that would still allow it to set its own rules subject to this constraint.
Both sides seem keen to conclude some form of trade deal.
Neither will want to endanger a recovery in activity next year from the current very deep recession, by heaping tariffs and trade restrictions on businesses, risking a fresh economic shock.
Agreement on the other main issues in the talks—fisheries rights, co-operation on security arrangements and governance via some form of disputes resolution mechanism, should be easier to achieve if real progress is made in the negotiations on trade over the summer.
Given the limited time remaining for the negotiations, however, it looks like it will be just a minimal trade deal, largely focused on avoiding the imposition of tariffs and quotas on goods.
It is unlikely to extend to the services sector, the main export engine of the UK economy, most notably financial services.
It will be a pale shadow of the current Single Market and, indeed, the comprehensive free trade deal that was promised at the time of the Brexit referendum in 2016.
Trade will be far from frictionless under a free trade agreement, with increased administration, compliance and delays, all bringing extra costs.
Businesses will need to prepare for such a markedly changed trading relationship with the UK.
However, even a minimal trade deal would limit the immediate economic shock of Britain leaving the Single Market.
It should also provide the basis for continuing cordial relations and could be built on in future talks in the years ahead.
In this instance, half a loaf is certainly better than none at all.
Even just a ‘bare-bones’ trade deal should allow sterling recover some of the ground it has lost since earlier in the year.
However, the gains by the currency may be limited as the UK’s departure from the EU Single Market for a new much inferior trading relationship will inhibit the growth of the economy over the medium term.
Thus, the euro may only fall back to around the 87p-88p level, above the 83p-85p range it occupied in January and February.