The Bank of England warned yesterday that uncertainties related to Brexit have "intensified considerably" since early November and are increasingly weighing on the U.K. economy.
While unanimously deciding to keep the bank's main interest rate unchanged at 0.75 percent, as expected, the nine-member rate-setting panel noted a series of negative economic developments amid the Brexit impasse.
Britain is due to leave the EU on March 29 but Prime Minister Theresa May has been unable to get lawmakers to agree her Brexit deal and is delaying a vote on it until mid-January.
At the moment, it looks like her deal, which foresees close ties between Britain and the EU on the trade in goods, will struggle to get through parliament. What would happen then is extremely unclear and the great economic concern is that Britain could crash out of the EU without a deal and without a transition period that will smooth the process to new trading arrangements. As well a sharp fall in those U.K. stocks that primarily operate in the country and a further decline in the value of the pound, Bank of England policymakers said business investment was likely to remain weak and the housing market subdued. "The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for U.K. growth," the rate-setters said, according to minutes of their meeting on Wednesday. Bank staff said the U.K. economy may only grow by 0.2 percent in the fourth quarter of the year from the previous three-month period, 0.1 percentage point lower than thought last month.
"The broader economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular: the form of new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond." The British economy has slowed down since the country voted in June 2016 to leave the European Union and many forecasters are warning of a potential recession if no Brexit deal is agreed by the time Britain is due to leave the bloc. Last month, the Bank of England itself said that in a worst-case scenario, the British economy could shrink by a massive 8 percent within a few months and unemployment and inflation would spike.
In that "disorderly and disruptive" scenario, four decades of economic alignment would be reversed, with tariffs placed on exports and border checks reinstalled, and restrictions could hit travelers and workers. Shortages of medicines and food could also materialize. For many British businesses, the current stalemate in Parliament is worrying, especially those dependent on trading in the EU and that helps explain why business investment has been so weak of late.
Both Britain and the EU have this week ramped up their preparations for a potential no-deal outcome.