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Author: Tan KW   |   Latest post: Thu, 25 Apr 2019, 2:32 PM

 

Brexit delay adds another dimension of damage to UK economy

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LONDON: A delay to Brexit this week may be better than the alternatives, but that’s cold comfort for the U.K. economy.
 
Parliament voted Wednesday to rule out leaving the European Union without a deal, seen by most economists as the worst case. While another vote Thursday is likely to buy time for an orderly divorce, that would hurt, too, by prolonging the uncertainty for businesses and consumers. Investment decisions are already being put off, and more deferrals are likely.
 
“We welcome MPs commitment to taking no deal off the table, however, it remains the default option if nothing else can be agreed,” said Helen Dickinson, head of the British Retail Consortium. “Businesses face mounting costs with every passing day as they try to mitigate the disruptive effects of leaving without a deal.”
 
Bank of England policy makers have already lowered their forecast for business investment to a 2.75 percent decline for 2019 -- from the 2 percent gain predicted previously -- and that assumes a smooth exit this month. Jonathan Haskel, who joined the bank’s Monetary Policy Committee six months ago, warned this week that any delay would maintain the current level of uncertainty, further crimping spending.
 
That’s not just the view from the top.
 
“If there’s a delay, then that could be the worst thing that happens,” Alex McNeil, a commercial and residential valuer at Bramleys, a real-estate agency in Huddersfield, northern England, said last week. “We’d just end up in a further period of hiatus.”
 
What Our Economists Say
 
“News that Brexit could be delayed is hardly good for an economy that has been struggling to maintain growth momentum in recent quarters. Business investment, especially, would continue to suffer as the potential cliff-edge scenario would likely remain within the planning horizon of companies.”-- Dan Hanson, Bloomberg EconomicsClick here to view the full U.K. REACT
 
As Prime Minister Theresa May acknowledged Tuesday, “an extension does not solve the problems we face.”
 
Some investors aren’t waiting for a clearer outcome. Nissan Motor Co. said last month it’s dropping plans to build a new model in Britain, citing uncertainty over Brexit. Some of the world’s biggest banks have outlined plans to transfer several thousand staff to cities such as Paris, Dublin and Madrid.
 
There are bright spots, however. Goldman Sachs Group Inc. analysts say an extension of the Brexit process would be good news for the pound as it opens the door for a closer relationship with the EU. Sterling could rally toward 80 pence per euro, a level not seen since the Brexit vote in 2016, should a move to extend the deadline pave the way for “softer outcomes,” the U.S. bank wrote.
 
Whatever the outcome, much of the Brexit damage may be irreversible. In a speech last month, Bank of England policy maker Gertjan Vlieghe said the vote has cost the U.K. about 2 percent of its gross domestic product since June 2016, compared with a scenario without “significant domestic economic events.”
 
That’s about 40 billion pounds ($53 billion) a year, or about 800 million pounds a week in “bus units,” he said. That was a not particularly subtle dig at the Leave supporters’ red campaign bus before the referendum, which carried ads suggesting that a vote for Brexit would free up 350 million pounds a week for the National Health Service.
 
The U.K.’s Office for Budget Responsibility on Wednesday cut its forecast for U.K. economic growth to 1.2 percent for 2019, from 1.6 percent.
 
In February, Vlieghe dismissed suggestions from lawmakers that a no-deal departure on March 29 would give helpful certainty to businesses.
 
“The only way to reassure” companies is to “tell people what the change is going to be, then give them several years to prepare for that,” he said. “Don’t change the framework overnight.”
 
 
 - Bloomberg 
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