UK economy expected to slow after rush to prepare for Brexit

May 02, 2019 - 4:36 am

LONDON (AP) — The British economy is likely to weaken as firms stop rushing to prepare for a Brexit date that has now been delayed by months, the Bank of England said Thursday.

In quarterly economic forecasts published alongside the unanimous decision to keep the main interest rate at 0.75 percent, the central bank said stock-building by companies had helped first quarter economic growth rise to a quarterly rate of about 0.5 percent. That's more than double the previous projection of 0.2 percent made in February. Official figures are due next week.

Growth is forecast to dip to 0.2 percent in the second quarter and uncertainty remains high due to Brexit.

"The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular," the minutes to the central bank's meeting said.

In the run-up to Britain's scheduled departure from the EU on March 29, firms sought to build up their stocks to prepare in case the country left the bloc without a deal. A no-deal Brexit could have delayed shipments of imports, for example.

Since then, Britain has been granted an extension to its departure to Oct. 31 after Parliament twice rejected Prime Minister Theresa May's Brexit withdrawal deal with the EU.

The central bank had previously warned the British economy could shrink by 8 percent in the months after a 'no-deal' Brexit as tariffs and other restrictions are slapped on many traded goods. Now that the prospect of a 'no-deal' has been postponed, firms have little immediate need to carry on with some of their contingency plans.

According to the Bank of England, two thirds of firms said they were as ready as they could be for a 'no-deal' Brexit with no transition to a new trading relationship. Under the terms of May's deal, Britain has until the end of 2020 to adapt to new relations, which will involve the country remaining in the tariff-free and frictionless EU single market and customs union.

Uncertainty over Brexit will continue for weeks or months, weighing on business investment for longer than previously anticipated. Business investment has been falling for over a year and is set to drop in the coming quarters, too, as firms seek clarity on Britain's future relationship with the EU. The central bank had previously forecast that business investment would start rising again soon after the Brexit deal had been passed.

Falling business investment is one of the main reasons why the British economy grew in 2018 at its lowest level in six years. Some pick-up is anticipated this year, though that's more to do with financial conditions — such as lower levels of interest rates around the world and stronger stock markets — rather than any belief that a 'no-deal' Brexit is less likely.

The Bank of England said annual growth is expected to be 1.6 percent this year, up its last forecast of 1.3 percent. Unemployment is seen falling to a low of 3.5 percent by 2022, with inflation back above the 2 percent target. The forecasts do not envisage much movement in interest rates, with one quarter-point hike factored in over the coming couple of years.

The bank was careful to note that all its projections depend on the nature and timing of Britain's withdrawal from the EU and on the assumption that Brexit, when it occurs, will be "smooth."