Brexit Economic Disruption ‘Unavoidable’ With The Worst To Come

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UK firms risk collapse on a “significant” scale if Brexit leaves them struggling to raise cash in the sectors most exposed to trade disruption, a think tank has warned.

A new report by the Institute for Fiscal Studies (IFS) sounds the alarm over the economic toll as Britain’s EU trade relationship unravels when it sees Brexit ‘go live’ at the end of the year. A transition period, keeping Britain closely tied to the bloc, expires on 31 December.

“Deal or no deal, substantial economic disruption in early 2021 is now likely unavoidable,” said the bleak IFS analysis published on Tuesday. “The majority of Brexit-related adjustment lies ahead.”

Yet some consequences could last for decades, according to the study, with areas and workers linked to EU-reliant manufacturing, financial and business services falling victim to a “substantial restructuring” in the economy.

The biggest effects of Brexit are also likely to hit sectors different to those hardest hit by the pandemic, according to researchers.

The IFS warns:

The UK government’s red lines — resisting EU rules on standards or any transition extension — mean even a new deal will be “much closer” to no-deal than former prime minister Theresa May’s ‘Chequers’ plan. “This sort of agreement is unlikely to avert most of the adverse consequences for UK–EU trade associated with Brexit.”

GDP growth will be 2.1% lower next year than if the UK remained closer to the EU, staying in its single market and customs union. “In a normal year, this would be enough to push the economy into recession.

A likely “thin” trade deal will mean new barriers that effectively make UK-EU trade 9% more costly for firms, or 13% more costly if no deal is struck. “We expect the new barriers between the UK and the EU to subsequently weigh sharply on trade in 2021 Q1.”

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The hit to exports from new trade barriers leaves transport, distributed services and manufacturing most exposed given small cash buffers, lower preparedness and high EU trade flows.

Manufacturing and business services firms geared towards EU trade will suffer a “substantial write-off to capacity,” some expertise and capital will become “surplus to requirements.”

Such hard-hit sectors face a “small but significant hit to employment,” and workers with strong sector-specific skills but few formal qualifications may struggle to find work.

Barriers to EU imports will push up prices, with inflation expected at 3.5% next year even if a deal is reached.

Exposed sectors like manufacturing may risk a similar tightening in credit to the one seen ahead of looming Brexit deadlines last year. Such a repeat risks business failures given firms’ struggles to remain solvent during the pandemic.

But the think tank expects stockpiling to pick up as firms prepare in the final three months of this year. “These trends may boost UK industrial production and GDP growth.”

It warns: “The UK has traditionally shown itself to be a relatively flexible economy. This reputation is likely to be tested to the extreme over the coming years.”

Yahoo finance

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