Bank of England says Brexit uncertainties ‘more entrenched’

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Governor of the Bank of England, Mark Carney speaks during the Bank of England interest rate decision and inflation report press conference at the Bank of England in London, Thursday, Aug. 1, 2019. Brexit uncertainties are becoming “more entrenched” and increasingly weighing on the British economy less than three months before the country is scheduled to leave the European Union, the Bank of England said Thursday.(Chris J Ratcliffe/Pool Photo via AP)

LONDON (AP) — The probability that Britain’s economy slips into recession early next year is rising even if the country manages to negotiate a smooth and orderly exit from the European Union in the weeks ahead, the Bank of England warned Thursday.

With Brexit uncertainties becoming “more entrenched” as evidenced by the slide in the pound to 30-month lows, and the global backdrop deteriorating because of the trade conflict between the U.S. and China, the bank warned in its quarterly economic projections that there is now a one-in-three chance that Britain could end up in recession in 2020 even if a no-deal Brexit is avoided. The last time the risk of recession was this high was August 2016, just after Britain voted to leave the EU.

While unanimously opting to keep the bank’s main interest rate on hold at 0.75%, the nine-member policymaking panel said heightened fears about the possibility of a disorderly and disruptive no-deal Brexit on Oct. 31 were hobbling growth and set to keep already-weak business investment further in check over the coming months.

“Global trade tensions have intensified, global activity has remained soft and the perceived likelihood of a no-deal Brexit has increased significantly,” Bank of England Governor Mark Carney said.

“Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on U.K. economic performance,” he added.

In its projections that are conditioned on a smooth Brexit scenario, the bank said economic growth in the second quarter is set to be flat, down from 0.5% in the first three months. That, it said, is partly related to the unwinding of Brexit contingency measures that firms took in the run-up to the original March 29 Brexit deadline, as well as a higher probability of a no-deal Brexit and worries over a trade war between the U.S. and China.

The bank cut its growth forecasts for this year and next of 1.3%, down from its previous forecasts of 1.5% and 1.6%.

The pound has borne the brunt of market concerns over a no-deal Brexit, falling around 6% in the three months since the bank last published its projections — its fall is illustrative of the fact that investors expect the country to be poorer than it otherwise would have been. Though its fall may be a boon to exporters, it raises inflation by making imports more expensive. Some of those are visible almost immediately, such as fuel and food.

The pound has fallen sharply in recent days as new Prime Minister Boris Johnson said Britain will leave the EU on Halloween come what may. On Thursday, it fell to $1.2085, its lowest level since January 2017.

“Recent price action clearly highlights that market participants are beginning to throw the towel in on hopes for a smooth Brexit,” said Lee Hardman, a currency strategist at MUFG Bank.

Most economists think that a no-deal Brexit would plunge the British economy into a deep recession as firms struggle to cope with the subsequent imposition of tariffs on traded goods. The bank has previously warned that a worst-case rupture could see the British economy shrink by 8% in a matter of months after Brexit, though it has since indicated that better preparedness for such an outcome mean that the likely recession would not be as severe.

Though learning about potential tariff schedules or stockpiling resources can help cushion the blow, Carney said there would be an “instantaneous shock” to the economy from a no-deal Brexit that would lead to a further fall in the pound, a spike in inflation and lower growth.

Preparations, he said, “cannot eliminate the fundamental economic adjustments to a new trading relationship that a no-deal Brexit would entail.”

Since Britain voted to leave the EU in June 2016, the bank has assumed that its departure would be orderly, that Britain would negotiate a settlement with the EU which would lead to a smooth pathway to a new future trading relationship. Though Johnson’s predecessor, Theresa May, negotiated a deal with the EU, it was rejected by the British Parliament on three occasions.

Johnson has said he wants a renegotiation but won’t join in if the EU rejects opening up the so-called withdrawal agreement. The EU says that’s not open for discussion, hence the rising talk of a no-deal Brexit and the pound’s woes. Though Johnson has embarked on this no-deal path, it’s not clear whether he would be able to push it through given what appears to be a majority in Parliament against. As a result, there’s also growing talk that Johnson may seek to call a general election in the run-up to the Brexit date on Oct. 31 and that he will stand on a no-deal platform.

Were Britain to leave the EU in an orderly fashion, the bank said there would be some upside to the British economy as executives breathed a sigh of relief and put in motion dormant investment plans. However, it did note that a Brexit deal would likely see the pound rise again and that would limit some of the upside.

In a smooth Brexit scenario, rate-setters said growth would accelerate to “robust” levels in the second half of 2020, “reflecting a gradual recovery and firm U.K. domestic demand growth, driven in large part by a recovery in investment growth as uncertainties dissipated.”

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