LONDON – The British economy is likely to weaken as firms ease up on Brexit preparations now that the departure from the European Union has been delayed by months, the Bank of England said Thursday.
In forecasts published alongside the unanimous decision to keep the main interest rate at 0.75%, the central bank said stock-building by companies had helped first quarter economic growth rise to a quarterly rate of about 0.5%. That’s more than double the previous projection of 0.2% made in February and largely due to Brexit-related stock building. Official figures are due next week.
Growth is forecast to dip to 0.2% in the second quarter as the stock-building boom eases.
“Concerned about disruptions to trade given the potential March 29 cliff edge, companies on both sides of the Channel brought forward production, pushing U.K. goods imports and exports with the EU to decade highs in the three months to February despite the doldrums in both economies,” said Bank Governor Mark Carney.
Ahead of Britain’s scheduled departure from the EU on March 29, firms prepared for a scenario in which the country left the bloc without a deal. A “no-deal” Brexit could have delayed and added costs to the shipments of imports, for example.
Since then, Britain has been granted an extension to its departure to Oct. 31 after Parliament rejected Prime Minister Theresa May’s Brexit withdrawal deal with the EU on three occasions.
The central bank had previously warned the British economy could shrink by 8% in the months after a “no-deal” Brexit. With the delay, firms have little immediate need to carry out more contingency plans.
According to the Bank of England, two thirds of firms said they were as prepared as possible be for a “no-deal” Brexit. Under the terms of May’s deal, Britain has until the end of 2020 to adapt to new relations, which will involve the country remaining in the tariff-free and frictionless EU single market and customs union.
“It remains the case that companies are only as ready as they can be, and they expect a market decline in the rate of growth, investment and employment in the event of a hard Brexit,” Carney said.
Uncertainty over Brexit will continue for weeks or months, weighing on business investment for longer than previously anticipated. Business investment has been falling for over a year and is set to drop in coming quarters, too. The central bank had previously forecast that business investment would start rising again soon after the Brexit deal had been passed.
Falling business investment is one of the main reasons why the British economy grew in 2018 at its lowest level in six years. Some pick-up is anticipated this year, though that’s more to do with financial conditions—such as lower levels of interest rates around the world and stronger stock markets—rather than any belief that a “no-deal” Brexit is less likely.
The Bank of England expects growth of 1.6% this year, up from its last forecast of 1.3%. Unemployment is seen falling to 3.5% by 2022, with inflation back above the 2% target. The forecasts do not envisage much movement in interest rates, with one quarter-point hike factored in over the coming couple of years.
Carney cautioned that investors may be underestimating future interest rate rises. The governor, who is to leave his post in January, stressed however that any rate rises would be “gradual” and “limited.”
The bank was careful to note that all its projections depend on the timing of Britain’s withdrawal from the EU and on the assumption that Brexit, when it occurs, will be “smooth.”