Bank of England forecasts hit to economy in early 2021 as Brexit transition ends

The Bank of England has forecast a 1% hit to the economy in early 2021 as a result of the end of the Brexit transition period – even if there is a deal with the European Union.

With the clock running down before the UK leaves the single market and customs union at the end of the year, significant gaps remain between the two sides in post-Brexit trade negotiations.

Downing Street was forced to deny that the extension to the coronavirus furlough scheme, which will now run until the end of March, was partly motivated by fears about the economic disruption that will occur on January 1.

The Bank’s Monetary Policy Committee (MPC) based its assessment on the UK striking a Canada-style free trade deal, the Prime Minister’s preferred outcome in the talks with the EU.

The report raised concerns about smaller firms being ready for the increased bureaucracy that would be involved in exporting to the EU outside the single market and customs union.

“The expected reduction in exports, and the impact on domestic supply chains, reduces projected GDP directly by around 1% in 2021 Q1,” the report said.

The Bank’s governor Andrew Bailey said: “Recent evidence from the Bank’s agents and a range of business surveys and intelligence suggests that while some businesses feel prepared for the change in trading arrangements, others – particularly smaller firms – do not feel fully ready, with Covid having hampered some preparations.

“Therefore in the central case in our November projections, adjustment by businesses to the new arrangements is assumed to lead to a further, temporary, effect on trade in the near term.

“These additional effects on trade are assumed to be temporary and to unwind over the course of six months, as businesses adjust.”

In a sign of the uncertainty among businesses with less than two months to go before the major changes, the haulage industry warned it was not ready for a no-deal outcome, something which Downing Street has not ruled out.

Rod McKenzie, policy director of the Road Haulage Association, told a Scottish Parliament committee: “It’s been a shambles from beginning to end.

“The information we have is incomplete, inadequate and quite often totally incomprehensible.

“We feel we have been badly let down by the UK Government from beginning to end.”

Number 10 denied that the extension of the furlough scheme had anything to do with concerns about the economic hit from the changes in the trading relationship with the EU.

The Prime Minister’s official spokesman said: “That is absolutely not the case. The announcement made by the Chancellor today is part of the Government’s ongoing support for businesses affected by coronavirus.”

The UK side also rejected as “simply untrue” suggestions from EU members that it was stalling for time in the negotiations until the conclusion of the US electoral process.

“We have said on a number of occasions that time is in short supply and we really need to be making more progress in bridging the gaps which remain between the UK and the EU,” the spokesman said.

“In terms of the future, it’s always been our position that we would rather leave with a free trade agreement but the Prime Minister continues to hold the view that we will prosper whether we leave with a Canada-style deal or on Australian-style terms.”