Brexit extension intensifies damage to British economy

Britain’s protracted divorce from the EU is hurting the world’s fifth-largest economy as dwindling company investment, signs of a looming labour market shock, and poor productivity hinder growth, according to Goldman Sachs.

Brexit extension intensifies damage to British economy

Britain’s protracted divorce from the EU is hurting the world’s fifth-largest economy as dwindling company investment, signs of a looming labour market shock, and poor productivity hinder growth, according to Goldman Sachs.

The UK was due to have left the EU on March 29, though prime minister Theresa May has been unable to get her withdrawal agreement approved by parliament. The new deadline is October 31, more than three years since the 2016 referendum.

Goldman Sachs said in a note to clients that its base scenario was that the divorce deal would be ratified by May 22 but that there was a risk of Britain’s exit being delayed until much closer to the new October 31 deadline.

“The politics of Brexit have become more protracted and, as a result, the side-effects of Brexit on the UK economy have intensified,” Goldman said in a note entitled ‘Brexit — Withdrawal Symptoms’.

From both a top-down and a bottom-up perspective, Brexit has taken a toll on the UK economy — even though it has not yet happened.

It said Britain’s economy has underperformed other advanced economies since mid-2016, losing nearly 2.5% of GDP relative to its pre- referendum growth path, in large part due to weaker investment.

Bank of England governor Mark Carney said in February that Britain had lost around 1.5% of GDP compared with the central bank’s expectations before the referendum.

Mr Carney said this month that uncertainty facing British businesses has gone “through the roof” due to Brexit.

Capital expenditure by UK-based businesses has been particularly subdued, said Goldman, and strong employment data masks a deepening misallocation of resources to labour rather than capital, which will ultimately make the economy less efficient.

Since the referendum, firms have hired workers rather than invest in capital, said Goldman economists.

Business investment in the UK has grown by just 0.3% in cumulative terms since June 2016, and 2018 was the first year in at least half a century during which business investment contracted in every quarter without a recession, said Goldman.

An increasingly tight labour market could also be a sign of strain rather than resilience.

“Until the UK’s departure from the EU is resolved, it is difficult to have conviction in a strong rebound in growth,” said Goldman.

“In 2020, with Brexit resolved, we do expect a pick-up in activity as uncertainty abates.”

- Reuters

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