No-deal Brexit spells more pain for Britain's already-weakened economy

An anti-Brexit protester holds a flag outside the Houses of Parliament in London, Britain on Aug 28, 2019.
An anti-Brexit protester holds a flag outside the Houses of Parliament in London, Britain on Aug 28, 2019.PHOTO: REUTERS

LONDON (BLOOMBERG) - Britain has just edged closer to a no-deal Brexit that could deal another blow to an economy already strained by domestic uncertainty and a global slowdown.

Companies have consistently lobbied for a transition period when the nation leaves the European Union, yet Prime Minister Boris Johnson shrugged those calls off on Wednesday (Aug 28) when he said he plans to suspend Parliament before taking the country out of the bloc on Oct 31.

The business community was quick to respond, warning that more political chaos will cause further pain in country already on the brink of recession.

Here's how the economy looks with two months to go.

SLOWDOWN

The economy shrank in the second quarter, though that was largely payback after Brexit stockpiling at the start of the year. With so much "noise" in the numbers, it's hard to disentangle how much of the loss of momentum in the economy is down to a natural slowdown, weaker global demand, or Brexit. The economy is forecast to rebound this quarter, but a chaotic departure from the EU would lead to a more serious downturn.

INVESTMENT SLUMP

One area of the economy that's definitely taken a hit from Brexit uncertainty is investment. It's fallen for four straight quarters and was down 1.6 per cent year on year in the three months through June. Bank of England Governor Mark Carney says a Brexit deal will release some of that delayed spending, but some of it is lost forever. The BOE's gloomy outlook for investment, predicated on some form of deal, sees it dropping 2 per cent this year and another 1.5 per cent in 2020.

 
 

CURRENCY WEAKNESS

The weaker pound has helped lift the share price of internationally exposed companies on the FTSE 100, though it hasn't triggered an export boom.

It's also lured in foreign buyers looking for bargains in the UK corporate sector. While some argue that this shows how Britain remains an attractive investment destination, the currency can't be ignored as a big factor. Sterling has lost 18 per cent against the dollar since the referendum more than three years ago. The number of overseas acquisitions of British companies jumped in 2018 to the highest in at least 15 years.

THE BRIGHT SPOT

All hail the labour market. Jobs growth has continued apace in recent years, pushing unemployment to the lowest since the 1970s. It's also starting to feed through to wages. Annual growth has started to pick up and, importantly, pay is now outpacing inflation. Even with weakening consumer confidence, the continued good news from the labour market is helping to keep consumers spending.

However, there have been some signs of the Brexit jitters, with the latest data showing vacancies falling to their lowest since early 2018. That could hint at some nervousness about taking on extra staff in an increasingly uncertain environment.

LONG-TERM PROBLEM

Britain's dismal productivity performance shows little sign of going away. Annual productivity growth has averaged around 0.5 per cent since the financial crisis compared with over 2 per cent in the years prior to 2008, and more recently has seen outright declines. Brexit could compound the problem by killing off some vital investment and reducing the inflow of skilled labour.