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U.K. Companies Fret for Economy After Boris Johnson’s Latest Move

The worst case Brexit for British companies is a step nearer to reality after Boris Johnson’s latest move to force a departure from the European Union on Oct. 31.

The prime minister’s plan to suspend Parliament for almost five weeks ahead of the planned departure date means the chances of an economically damaging no-deal are on the rise. That’s a possibility corporate lobbies have been warning against for years.

The pound slumped after the announcement Wednesday, adding to the uncertainty that is already discouraging companies from investing.

“Businesses feel like Westminster is playing an endless game of political chess, while their futures and the health of the U.K. economy hang in the balance,” said Adam Marshall, director general of the British Chambers of Commerce. “None of the events of the last few days have given businesses greater confidence.”

A sudden imposition of trade barriers could induce a major supply and demand-side shock, economists say. A break in the harmonization of regulations between the U.K. and its largest trading partner alongside limits on the movement of people would also be devastating for services, the largest part of the British economy.

The severity of the hit will ultimately depend on the extent of the disruption at the border and just how much the fallout knocks sentiment, according to Dan Hanson of Bloomberg Economics. If there is no deal, growth will probably slow sharply, though the economy should avoid a recession, he said. If there’s a more disruptive break from the bloc, there could be a yearlong recession where output drops 2%.

What Our Economist Says:

“The chances of the U.K. leaving without a deal just took another leg higher.”– Dan Hanson. For the full INSIGHT, click here

“No matter how much preparation the government and businesses do for no deal, only a good deal with the European Union protects jobs, communities and the economy,” said a spokesman for the Confederation of British Industry. “This must be the relentless focus of politicians.”

Bank of England Governor Mark Carney has said that businesses are doing what they can to prepare, but they still expect output to fall. Speaking at a Federal Reserve symposium in Jackson Hole, Wyoming last week, Carney said that “the biggest economic headwind is weak business investment, which has stagnated over the past few years” and “there is overwhelming evidence that this is a direct result of uncertainties over the U.K.’s future trading relationship with the EU.”

It’s not the first time that Johnson has clashed with companies. Long before he became prime minister, he reportedly responded to concerns about a so-called hard Brexit with a four-letter epithet at an event for EU diplomats in London last year. In his first speech as premier, he changed tack, saying he was “giving business the confidence to invest across the U.K.”

Business investment dropped 1.6% in the second quarter from a year earlier. The BOE sees it declining 2% this year and continuing to fall in 2020.

“We continue to urge firms to make whatever preparations they reasonably can,” said Allie Renison, head of Europe and trade policy at the Institute of Directors. “We also hope to see more detail from No. 10 on its pathway to a deal and greater substance from the government on boosting overall preparedness.”
Source: Bloomberg

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