The Bank of England has warned that Brexit is likely to weigh on the UK economy next year, as new checks at the border slow and disrupt trade.
The central bank said on Thursday that changes to the trading relationship with the European Union would likely shave 1% off UK GDP in the first quarter of 2021.
The Brexit transition period is set to end on 1 January 2021. The EU and UK have yet to agree a trade deal, increasing the possibility of a disruptive and abrupt end to the transition.
Even if a free trade agreement is signed, traffic passing over the border will require more paperwork. This adds to cost and time, depressing the value of trade between the two blocs.
The Bank of England assumes that the UK will strike a Canada-style free trade deal with the EU but the central bank said trade was likely to be “lower” due to the increased border friction.
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The central bank also warned that there was a lack of preparedness among some businesses for the upcoming changes.
“On the whole, larger firms are more prepared than smaller firms,” Bank of England governor Andrew Bailey told journalists on Thursday. “A lot of firms when you ask them say: we’re as ready as we can be.”
Bailey said an estimated 70% of companies were ready for the changes. Last month Lord Agnew, a minister of state working on Brexit preparedness at the Treasury and HMRC, warned that some businesses were taking a “head in the sand” approach.
The Bank of England’s warning on the impact of Brexit was included in its bi-annual Monetary Policy Report, which summarises the bank’s view on the UK economy and its approach to it.
Growth forecasts for this year and next were downgraded, largely reflecting the worsening of COVID-19 in recent months. The Bank of England announced an additional £150bn of bond buying to try and stimulate faltering economic activity in the UK.