The Risk of Disorderly Brexit Nearly Flatlines UK Economy

In November, the British economy almost flatlined in the face of a disorderly Brexit. Service sector firms pushed to rein in business activity to the weakest level experienced since just after the EU referendum two years ago. The biggest sector of the UK economy – banks, hotels and restaurants – reported very little expansion.

The Bank of England and the Treasury, responsible for gauging business activity, hinted that fears over a no-deal Brexit is what led companies to delay investment decisions. In turn, this stalled new work. Philip Hammond, the chancellor, freely admitted that all versions of Brexit would prove to be negative for the UK economy. Even so, he stressed how important it was to not betray the vote to leave the EU.

Hammond told the Treasury select committee: “Any solution which left … a large segment of the population betrayed, in my view would have a negative political and societal impact which would far outweigh the very small economic impact [of May’s deal].”

One of the biggest areas affected by Brexit is services. Services account for almost four-fifths of the UK’s gross domestic product. However, recent surveys have also suggested that the construction sector and manufacturing industry have had their momentum drained by Brexit.

Economist at the Dutch bank ING, James Smith, said the recent reading of the monthly IHS Markit/Cips services index “demonstrates fairly clearly that the elevated risk of a ‘no deal’ Brexit is beginning to have a tangible impact on growth”.

According to data released, the index was down from 52.2 in October to 50.4 in November. (Readings above 50 denote expansion, while readings of less than 50 represent contraction.) Companies have been reporting that the shrinking demand for consumer services reflects the pressure on household finances, which have been affected by higher inflation.

Despite the slowing economy in the final months of 2018, the Confederation of British Industry has predicted steady growth over the next two years, as long as there is a smooth Brexit. If a disorderly Brexit is avoided, CBI says there will be an improvement in business investment and growth in UK exports.

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