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Impact of Brexit on economy ‘worse than Covid’

The impact of Brexit on the UK economy will be worse in the long run compared to the coronavirus pandemic, the chairman of the Office for Budget Responsibility has said.

Richard Hughes said leaving the EU would reduce the UK’s potential GDP by about 4% in the long term.

He said forecasts showed the pandemic would reduce GDP “by a further 2%”.

“In the long term it is the case that Brexit has a bigger impact than the pandemic”, he told the BBC.

His comments come after the OBR said the cost of living could rise at its fastest rate for 30 years, with suggestions inflation could hit almost 5%.

Speaking after Wednesday’s Budget, Mr Hughes said recent data showed the impact of Brexit was “broadly consistent” with the OBR’s assumption that the leaving the EU would “reduce our long run GDP by around 4%”.

“We think that the effect of the pandemic will reduce that (GDP) output by a further 2%,” he added.

The Treasury has been contacted for comment.

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What is GDP and how is it measured?
GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing. It is a measure – or an attempt to measure – all the activity of companies, governments and individuals in an economy.

In a growing economy, quarterly GDP will be slightly higher than the quarter before, a sign that people are doing more work and getting (on average) a little bit richer. If GDP is falling, then the economy is shrinking.

The UK voted to leave the EU in 2016 and officially left the trading bloc on 31 January 2020, however, both sides agreed to keep many things the same until 31 December 2020, before a new trade deal was announced and implemented on 1 January this year.

Supply chain problems
Both the pandemic and Brexit have played a part in current supply chain issues across the UK, and have further exposed the scarcity of lorry drivers, which has resulted in recent shortages of products for businesses and some empty shelves for customers.

However, in the OBR’s latest report, the independent body said “supply bottlenecks had been exacerbated by changes in the migration and trading regimes following Brexit”.

Supply chain issues has led to the government granting short-term visas to EU workers across certain sectors, including the haulage industry.

The British Poultry Council has said turkey farmers will do their best to ensure Christmas “is as normal as it can be”, but warned shortages are likely, due to a shortage of seasonal overseas workers.

The government has assured consumers that turkeys will be available for the festive season and has also deployed temporary visas in a bid to bolster worker numbers.

Source: BBC

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Brexit is harming the UK economy, say 44% of voters

Almost twice as many voters now believe Brexit is having a negative effect on the UK economy as think it is benefiting the nation’s finances, according to the latest Opinium poll for the Observer, carried out during budget week.

The survey comes after Richard Hughes, the chairman of the Office for Budget Responsibility, said his organisation calculated that the negative impact on GDP caused by the UK’s exit from the EU was expected to be twice as great as that resulting from the pandemic.

Hughes said Brexit would reduce the UK’s potential GDP by about 4% in the long term, while the pandemic would cut it “by a further 2%”. “In the long term, it is the case that Brexit has a bigger impact than the pandemic,” he said.

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Opinium’s findings appear to be in line with other recent polling, including a survey last week by Ipsos MORI, which showed concern about the effects of Brexit rising to the point that it is now seen as the biggest issue for the country alongside Covid-19.

The Opinium survey found that 44% of people think Brexit is having a bad impact on the UK economy, compared with 25% who think it is having a positive effect.

More starkly, 53% of people believe Brexit is having a bad effect on prices in shops, against 13% who think it is having a good effect, while 51% think it is adversely affecting the UK’s ability to import goods from the EU, against 15% who think it is helping.

While chancellor Rishi Sunak’s approval rating rose slightly after his Budget speech on Wednesday, in which he increased government spending to its highest sustained level since the 1970s while warning that inflation would rise to 4% next year, the fact that people appear to be linking Brexit with economic problems including rising prices will be a worry to No 10 and No 11 Downing Street.

During the campaign for Brexit, led by Boris Johnson and Michael Gove, voters were told by the Leave campaign that leaving the EU would create a more dynamic UK economy able to trade freely across the globe, and less bureaucracy, leading to lower prices.

The OBR report, published alongside Sunak’s budget, said that its evidence to date suggested its previous forecasts that Brexit would lead to a 15% fall in both UK imports from, and exports to, the EU appeared to have been broadly accurate.

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The report said: “The evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our initial assumption of a 15% reduction in each.”

It is also made clear that shortages of lorry drivers were at least partly caused by Brexit.

Last week the Financial Times reported that whereas by August this year global goods trade had rebounded sharply since the height of the pandemic (according to the CPB World Trade Monitor), the UK was proving a notable exception, with its exports still sharply down.

Since the end of the Brexit transition period on 1 January this year, UK ministers have insisted that difficulties with trade to and from the EU would be short-lived and amounted merely to “teething problems” that would be resolved quickly once companies got used to the new arrangements.

While Opinium found evidence of clear anxiety about Brexit, this has yet to translate into a negative effect on support for the Tory party.

The Conservatives are on 40%, down 1 point compared with a fortnight ago, while Labour is down 2 points on 35%. The Lib Dems are on 8%, the Green party 7%, the SNP 5% and Plaid Cymru 1%.

By Toby Helm

Source: The Guardian

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UK Economy Has Endured A Torrid Start To 2021, Hit By A New COVID-19 Lockdown

UK economy has endured a torrid start to 2021, hit by a new COVID-19 lockdown and disruption caused by the country’s less open trade relationship with the European Union.

While better days are ahead, Bank of England officials meeting ahead of Thursday’s monetary policy announcement must weigh up the likely strength of the recovery, the lasting damage caused by the pandemic, and how much inflation might result.

Here are a selection of indicators that chart the progress of Britain’s economy so far this year:

BIG PICTURE: GDP, EMPLOYMENT STILL FAR BELOW NORMAL

The latest official data showed UK economy contracted in January, although not by as much as feared by some economists. Output remained 9% below its level in February 2020.

Tax office estimates of the number of employees on payrolls showed tentative signs of recovery in January. But they remain more than 700,000 below the pre-pandemic norm.

BoE Governor Andrew Bailey said on Monday he thought economic output would recover to its late-2019 level by around the end of 2021, helped by Britain’s speedy roll-out of COVID-19 vaccines.

IS THE INFLATION TIGER PROWLING?

BoE Chief Economist Andy Haldane last month described the threat of inflation as a tiger that was beginning to stir. Most of his Monetary Policy Committee colleagues sound less worried.

Gauges of price pressure in Britain paint a mixed picture.

The BoE’s rate-setters will find no cause for alarm in the latest surveys of inflation expectations among the British public, which have shown little change of late.

But companies are increasingly reporting increased cost pressures, especially among manufacturers and construction companies that are struggling with supply chain problems, according to the latest IHS Markit/CIPS surveys.

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TRADE TROUBLE

Trade between the United Kingdom and the European Union was hammered in the first month of their new post-Brexit relationship, with record falls in goods shipments in both directions as COVID-19 restrictions continued on both sides.

British goods exports to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7% in January compared to December, the Office for National Statistics said on Friday. Imports fell by 28.8% – another record.

The ONS said the COVID-19 pandemic, which put Britain back under lockdown measures in January, made it hard to quantify the Brexit impact from new customs arrangements, and there were changes in the way data was collected.

But there were also signs of a Brexit hit.

GILT YIELDS ON THE RISE

British government borrowing costs – measured by the yield on the benchmark 10-year gilt – have increased by more than 50 basis points over the last three months, the biggest increase in over four years.

The rise reflects the better prospects for UK economy as the country races ahead with its coronavirus vaccination campaign and a jump in U.S. Treasury bond yields on the back of U.S. President Joe Biden’s $1.9 trillion stimulus plan.

Finance minister Rishi Sunak says Britain’s stock of government debt is increasingly sensitive to rising interest rates. Some economists think that would only be a problem if borrowing costs went up without an economic recovery that would boost tax revenues for the government.

Despite the recent rise, borrowing costs are at historically low levels, with the 10-year gilt yielding 0.833% on Wednesday – similar to rates seen in late 2019 and way down from more than 5% shortly before the 2008-09 global financial crisis.

Reporting by Andy Bruce

Source: Reuters

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Don’t expect sharp post-Covid rebound for UK economy, warn Niesr economists

The UK economy will grow by little more than three per centin 2021 after a 10 per cent slump last year, with a double-whammy from Covid and Brexit likely to be felt for years.

Leading economists at the National Institute of Economic and Social Research (Niesr) are also pushing chancellor Rishi Sunak to raid the coffers once more for extra emergency support.

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Niesr slashed its growth forecast for 2021 to 3.4 per cent from a previous estimate of 5.9 per cent, after taking into account the UK’s third lockdown and Covid-19 wave.

It’ll be 2023 before the UK economy returned to pre-Covid levels, it said.

Last week, the Bank of England said it expected that to happen in the first quarter of next year.

“Despite the roll-out of vaccines, Covid-19 will have long-lasting economic effects,” Niesr’s deputy director Hande Kucuk said today.

By 2025, the UK’s economy was likely to be about six per cent smaller than expected before the pandemic, reflecting higher unemployment, weaker business investment and Britain’s more restricted trading relationship with the European Union.

Sunak – who has promised to spend £280bn on the UK Covid-19 response this financial year, taking the budget deficit to a peacetime high – is due to announce his plans for the next 12 months in a budget statement on 3 March.

By Josh Martin

Source: City AM

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How Brexit is already taking its toll on the U.K. economy

Prime Minister Boris Johnson recently qualified as ‘teething problems’ the many incidents and trade disruptions triggered by the start of Brexit.

With disruptions at European borders and supply chains perturbed by new tariffs, the U.K. economy has begun to show the negative economic impact of leaving Europe’s single market and customs union at the beginning of the year, several indicators show.

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  • Gita Gopinath, the chief economist of the International Monetary Fund, said this week as she was presenting the organization’s new economic forecast, that Brexit would shrink the U.K. economy “by about 1%” this quarter.
  • It was the only economy whose performance in 2020 was downgraded by the IMF, which estimates the country’s gross domestic product fell 10% last year.
  • Surveys by data company IHS Markit show that U.K. manufacturers and service providers are reporting the most severe disruptions of their supply chains, which is “almost exclusively linked to both Brexit disruption and a severe lack of international shipping availability.”
  • Freight volumes between the U.K. and the rest of Europe were down 38% in the third week of January compared with last year.
  • Paperwork, higher costs and compliance delays are severely affecting the traffic of goods on the U.K.-European Union routes, but they have an even more severe impact on trade between Britain and Northern Ireland, which remains in the single market.
  • The Office for Budget Responsibility, the official fiscal watchdog, predicted back in November that Brexit would shrink the U.K. economy by 4% in the long run with a free trade agreement such as the one that was signed between the two sides just before Christmas.

The outlook: Prime Minister Boris Johnson recently qualified as “teething problems” the many incidents and trade disruptions triggered by the start of Brexit. But from British fishermen to City of London finance professionals, many rather expect the government to act to try soften the blow.

The massive economic hit triggered by the COVID-19 pandemic may help hide the detrimental Brexit impact to the general population in the first half of the year. But it is hard to see how the government will be able to mitigate the consequences of being an outsider to the single market without taking steps back toward the EU and opening further discussions.

By Pierre Briançon

Source: Market Watch

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Sterling weakens against euro as post-Brexit deal rally falters

The pound weakened versus the euro on Britain’s first day of trading outside the European Union, but strengthened against a softer dollar, climbing above $1.37 for the first time since May 2018, as traders weighed up Brexit relief with COVID-19 risks.

The pound had strengthened after a last-minute Brexit deal was agreed on Dec. 24, which set rules for industries such as fishing and agriculture.

Although the deal does not cover Britain’s finance sector, UK market participants were relieved by an extension which allows them to use platforms in the European Union for swaps trading until March 2021 – a move announced on Thursday in a bid to avoid disruption.

At 0840 GMT on Monday, the pound changed hands at 89.77 pence per euro, down around 0.5% on the day.

Versus the weaker dollar, the pound was up 0.2% at $1.3682, having briefly crossed the $1.37 level for the first time since May 2018 early in the European session. The pound gained 2.5% overall against the dollar in December.

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Commerzbank’s head of FX and commodity research, Ulrich Leuchtmann, said that sterling’s recovery after the Brexit deal was agreed was “disappointingly limited”, but that it has further scope for gains in the next few days as traders adjust their positioning upon their return from holiday.

Leuchtmann was less bullish on sterling’s longer-term outlook, however.

“For market participants with a long-term outlook the concern that Brexit might constitute the beginning of renewed economic decline in the UK is more likely to dominate,” he said.

Sterling-dollar implied volatility gauges with one-month and three-month maturities, which spiked in December and then fell when the Brexit deal was agreed, have edged up again in the past few days, suggesting traders still expect price swings.

In bad news for sterling, COVID-19 cases in Britain are at record levels. Prime Minister Boris Johnson said on Sunday that tougher lockdown restrictions were probably on the way.

RBC Capital Markets analysts wrote in a note to clients that negative interest rates are likely to remain a possibility for the UK because, although a chaotic no-deal Brexit has been avoided, rising COVID-19 infections will have an impact on the Bank of England’s outlook for the economy.

Market participants are pricing in negative rates in the UK by May 2021.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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UK economy shrank by close to 11% in 2020, says Deutsche Bank

The UK economy likely shrank by close to 11% in 2020, according to Deutsche Bank, marking the worst annual contraction in three centuries.

The bank said growth prospects for 2021 on the other hand remained positive on the whole.

“While tighter restrictions and some Brexit disruption will likely further disrupt the UK’s recovery in the first quarter of 2021, an earlier-than-expected rollout of vaccines should support the UK’s journey toward normalcy next year,” it said.

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DB said that while it’s early days, it expects the recovery to firmly begin from the second quarter of this year.

“We see growth coming in closer to 5% next year,” it said, adding that risks to its forecasts are firmly tilted to the upside.

By Michele Maatouk

Source: Sharecast

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Analysis: Brexit trade deal sparks relief but UK market will bear scars

Britain’s trade agreement with the European Union removes a 4-1/2-year old fear of crashing out of the bloc without trading arrangements in place, but it will take UK financial markets years to lose their Brexit-inflicted scars.

The “no-deal Brexit” risk has weighed on Britain’s growth and investment prospects since June 2016, when citizens voted to sever ties with the country’s biggest financial services customer that accounts for $1 trillion of bilateral commerce a year.

So Thursday’s deal, seven days before the deadline, is an undoubted relief. Analysts are urging clients to snap up undervalued UK stocks, the worst performing of any major market since 2016 and many say they been buying sterling, which is near 2-1/2-year highs above $1.36..

But those hoping the deal will allow British assets to catch up with high-flying overseas markets may be disappointed.

The bare-bones nature of the deal leaves Britain far more detached from the EU than was thought likely in 2016. Further negotiations are inevitable in 2021 to flesh out the agreement.

It all means the discount that has dogged UK assets since 2016 will not vanish soon.

“Brexit does mean that the UK will likely lose some of its sheen,” said Seema Shah, chief strategist at Principal Global Investors.

While the news could lend some traction to British markets it would not protect the economy from long-term scarring, inflicted by a combination of Brexit and COVID-19, she said.

“Being excluded from the world’s largest single market area will see jobs, people, and capital flows trickle away from the UK, in search of destinations which instead embrace globalisation,” Shah added.

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Ilustrating the discount, UK stocks have underperformed since 2016 and lagged the global recovery since March that has sent rival indexes to record highs.

The British currency remains around 20% below its long-term fair value. Few expect it to recover fully in the near term.

The underperformance is largely driven by foreign investors dumping UK assets. Financial data provider eVestment estimates European and U.S.-domiciled investors have pulled more money than they have added into UK stocks almost every quarter between the referendum and the third 2020 quarter.

And because the size of the UK market has shrunk as a percentage of the global index, to 4% from 10% pre-referendum, foreign investors no longer need to hold as many UK stocks, said Caroline Simmons, CIO, UK, at UBS Global Wealth Management,

British equities may perform well against a backdrop where other markets look expensive – Simmons says UK shares trade at a 30% discount relative to global markets against a typical 10% discount.

But she does not expect them to recover fully.

“As for the Brexit discount, I do think some of it goes away but will it completely disappear? The drag on cumulative UK GDP as a result of Brexit is still sizeable,” she said.

COVID-19 COMPOUNDS BREXIT

As further shadow on the outlook, Britain’s economy, already weakened by Brexit uncertainty, has suffered the worst damage of any major country from the COVID-19 pandemic, with the second-quarter of 2020 witnessing the worst recession in 300 years.

That has forced the government to lift its borrowing to a peacetime record.

Economic recovery is complicated by weak “bricks-and-mortar” foreign direct investment. The net value of foreign direct investment (FDI) into the United Kingdom dropped to 49.3 billion pounds in 2018, a quarter of 2016 levels, official data shows.

This year will have seen 30%-45% fewer FDI projects than 2019, consultancy EY estimates, mostly because of the pandemic.

Hinesh Patel, a portfolio manager at Quilter Investors, said the Brexit deal “could unblock the backlog of international investment that has been waiting for some sort of outcome before institutions begin investing in UK plc once again.”

Others are less optimistic and say the watered-down ties with Brussels will inflict lasting damage.

“There’s a bit of short term versus long term story here,” Morgan Stanley head of cross asset strategy Andrew Sheets said, speaking before the deal announcement.

Removing the no-deal risk will raise average asset prices, Sheets said, but said: “It doesn’t fix the underlying economic challenges…You are facing a negative shock to services which are a large majority of the UK economy.”

Source: UK Reuters

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Pound traders brace for tense week as Brexit talks continue

Sterling traders are gearing themselves up for another nervy week amid fears that a collapse in Brexit talks could spark a sharp sell-off in the pound.

Negotiations are ongoing, but noises from both camps suggest they remain stuck on fishing rights and competition policy.

British health secretary Matt Hancock this morning told Sky News that the European Union was making “unreasonable” demands.

France appears to be taking a tough stand on fishing rights, arguing that it will not take a sub-standard deal.

The pound is currently trading at around two year highs of around $1.35. Yet it slipped back from even higher towards the end of last week as doubts about a Brexit deal emerged.

No-deal Brexit: Pound could hit $1.15 or lower

Economists at consultancy Capital Economics said last week that the pound could tumble to $1.15 in the event of a no-deal Brexit.

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Such an outcome would lead to disruption for businesses as well as higher tariffs for certain sectors. The UK’s budget watchdog has said it could knock two per cent off the economy next year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said no deal could see sterling fall to $1.23. He said it could fall to about €1.04 against the euro, from its current price of €1.103.

Nomura currency analyst Jordan Rochester said the pound could even plunge to $1.01 in a worst-case scenario where “capital markets struggle to function” amid financial disruption.

However, Tombs said the pound was “less vulnerable” than in 2016, when it dropped sharply after the Brexit referendum.

He said it is now less dependent on external finance thanks to a lower current account deficit. And he said the Bank of England also has less scope to cut interest rates, which would hurt the pound.

Analysts and investors are torn on whether the UK and EU will reach a deal. Analysts at UBS said that if a deal is struck and vaccines aid the economy then sterling could hit $1.37 by the end of 2021.

By Harry Robertson

Source: City AM

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Risks to UK economy as Brexit deadline approaches

With the UK economy suffering more from the coronavirus than most advanced nations, the stakes couldn’t be higher as Brexit trade negotiations enter their endgame.

Gross domestic product (GDP) will likely be smaller than what it would have been had the UK stayed in the European Union (EU) regardless of the outcome.

But reaching an accord would help avoid major trade disruptions come Jan 1.

Leaving without a deal, meanwhile, means that Brexit could end up inflicting more lasting damage than the pandemic, according to economists. Both sides say the onus is on the other to make a decisive move before the transition ends in just over a month.

The pandemic has put Britain on course for its deepest economic slump since the Great Frost of 1709.

By the first quarter of 2025, GDP will be 3.1% lower than anticipated in March, according to estimates by the Office for Budget Responsibility (OBR) released on Wednesday. The fiscal watchdog deems the loss of output to be permanent.

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In a separate analysis, the OBR said transitioning into a free-trade agreement with the EU would shave 4% off GDP in the long run.

A no-deal scenario – meaning a shift to World Trade Organisation rules – would mean losing another 1.5%. Dan Hanson of Bloomberg Economics puts the combined cost higher still, at 7% of GDP.

Jobs are also on the line. Unemployment is set to peak at 7.5%, or 2.6 million people, next year under the OBR’s central scenario that a trade deal be reached. A no-deal exit pushes the rate up to 8.3%.

Financial services and export-reliant manufacturing sectors such as the car industry, food and textile producers stand to be among the hardest hit if trade talks fail.

There are concerns that the time and money spent dealing with the pandemic has left many firms ill equipped to cope with the potential costs and disruptions ahead.

A Bank of England survey of chief financial officers last month found less than 4% of them were fully prepared for the end of the transition period.

Before the pandemic, businesses were already holding back on spending as they awaited greater clarity over Britain’s post-divorce relationship with Europe.

No matter what the outcome of the talks, a period of adjustment is likely to make it hard for companies to know how best to invest for the future, but a move to WTO terms risks keeping spending depressed for longer, hitting already weakened productivity. — Bloomberg

Source: The Star

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