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Remember Brexit? Why Britain can really struggle to get out of recession

But Britain is also racing to a self-determined deadline to establish a post-Brexit trade agreement with the European Union, the largest single market for exports, by the end of the year. The talks are not going well – increasing the likelihood of other major shocks such as an economic recovery that is expected to gain momentum.

“The whole world is progressing in recession because of coronavirus,” said Kallum Pickering, senior economist at Berenberg Bank. “But Britain has an additional problem in the UK-EU negotiations in the second half of this year.”

Even without considering the implications of Brexit, the British economy is in trouble.

The Bank of England said earlier this month that the economy could shrink 14% this year. That would be the biggest annual contraction since a 15% decline in 1706, based on the best estimate of the bank’s historical data. GDP could fall 25% in the three months to the end of June.

Data released by the British government in recent days has been dire. Claims for unemployment benefits jumped 69% to nearly 2.1 million last month. Inflation in April, meanwhile, fell for the third consecutive month to 0.8%, raising concerns that prices could enter a damaging downward spiral.

Non-essential restaurants and shops remain closed, and economists are not convinced that activities will be taken as soon as they are reopened.

The grim atmosphere was reflected on Wednesday when the British government sold its first bonds with negative results. This shows that demand is so high that investors are basically willing to pay the British government to lend money.

Gilts, as is known, is considered a safe haven asset, along with US, Japanese and German government bonds; Rising demand indicates that investors are worried that economic growth will remain depressed.

“The market reflects the economic reality, namely that the economy has collapsed,” said Robert Wood, chief economist at the UK at Bank of America.

The British pound has fallen more than 8% since the beginning of the year to less than $ 1.22, and has also fallen more than 5% against Euro currency. That FTSE 100 (UKX) the index in London has lost more than 21% year-to-date, compared to nearly 9% for the S&P 500, while the FTSE 250 index of British medium-sized companies dropped by more than 26%.

Trying to stem extensive economic damage, the British government borrowed £ 62.1 billion ($ 75.7 billion) in April, the highest level since records began in 1993. The government now projects it will need to borrow £ 298.4 billion ($ 363 , 3 billion) until March 2021, almost double the height of the global financial crisis.

And Bank of England Governor Andrew Bailey even hinted this week that official interest rates – currently 0.1% – could be negative for the first time in British history. His comments have prompted speculation that banks can choose negative interest rates by 2021, if the economy requires another injection.

“What the Bank of England has done is to abolish interest rate policies, so you can’t assume they won’t cut” below zero, “Wood said. “That said, clearly negative rates are one of the last resorts here.”

Brexit clock ticking

The risk they might need increases because British Prime Minister Boris Johnson has committed to break new British relations with the European Union by the end of 2020, after leaving the bloc in January.

Failure to reach an agreement can expose British companies to steep new tariffs, threaten their supply chains and do so their products and services are more expensive at the worst time. Britain has until 30 June to request an extension of the deadline, but the Johnson government has consistently said it does not want to do this.

The conversation did not go well. Michel Barnier, head of the EU Brexit negotiator, said last week that he was “not optimistic” about reaching an agreement with Britain, adding that the European Union would increase preparations for this year to end without new trade conditions.

The head of Britain’s Brexit negotiator, David Frost, said in a letter to Barnier on Tuesday that the European Union offered “a relatively low-quality trade agreement.”

Without agreement, the industry has been hit hard the pandemic will be even worse.
David Henig, a former trade negotiator and director of the UK Trade Policy Project at the European Center for International Political Economy, said in twitter Thursday that a 10% tariff for cars sent to the European Union will enter if an agreement is not reached, threatening at least £ 15 billion ($ 18.3 billion) in exports.

Pickering from Berenberg Bank is concerned that the running hours at the Brexit talks could create problems for Britain in the second half of the year, when economic growth is intended to take back.

Household spending, which makes up about 70% of GDP in the UK, will determine the trajectory of the UK recovery, he said. When the lockdown is over, the concern is that Britons will continue to save because of anxiety about their work or a second wave of infections, limiting the impact of government and central bank relief efforts.

Uncertainty related to Brexit will only encourage it exaggerated savings, according to Pickering.
British car sales fell 97% in the worst month since 1946

Even if Britain reaches a new trade agreement with the European Union, it is will not benefit like the old regime. Johnson pushed for an agreement that would allow Britain to also reach agreements with trading partners such as the United States.

In a draft proposal released by the British government this week, Britain reiterated that it did not want to be part of the EU single market, and instead sought an agreement in accordance with what the bloc already had with Canada or Japan.

“The worsening of your trade terms with the aim of nearly half your exports will be an economic negative,” said Bank of America’s Wood. “[It’s] another reason to expect recovery from this crisis to be a very long U [shape], and not V. “

Irish Prime Minister Leo Varadkar echoed this view on Thursday.

“Brexit will further complicate matters,” Varadkar said. “As I said a few months ago, Brexit isn’t over. It’s just halftime.”

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