20 March 2020

LSE: A Brexit extension will help stop this crisis becoming a disaster

After a quarter of flat GDP growth, Britain’s economy was hardly in the best position to weather the COVID-19 storm. The prospect of a disorderly Brexit will dent market confidence even further, writes Callum Tindall.

On 12 March, the FTSE 100 (index of the 100 largest UK companies) dropped 10.9% – its highest single-day fall since 1987. This follows flat GDP growth in Q4 2019, with almost certain decline expected in Q1 2020. The spread of COVID-19 means investors are extremely pessimistic about the outlook for the economy.

And if a deal cannot be reached, Brexit poses a further economic challenge. Market stability is important, as most British citizens are investors through pensions and there is an ongoing risk of business failures.

The UK government began with a paternalistic role, reinforcing the need for good personal responsibility, hygiene and self-isolation if required. The Budget initially committed £12bn to combating COVID-19 to support public services, provide sick pay and business rates relief for small and medium-size businesses. This was followed by a huge injection of £350bn to support businesses, which could further extend as the government vows to do “whatever it takes”.

 

The Bank of England has cut UK interested rates to a historic low of 0.1%, leaving almost no room for further movement. Following action by the European Central Bank, this was supported by an initial quantitative easing programme adding £200bn into the economy. With ongoing supply-side issues, it’s unclear how effective this will be. [...]

As COVID-19 continues to rampage across Europe, trade talks are naturally of lesser importance than high death tolls and economic shutdown. An extension – perhaps of six months – would be a wise move. It would indicate the UK’s prudent approach to crisis-management and instil confidence in its desire to get a well-constructed deal in the national interest.

Importantly, agreeing an extension does not mean it must be used, but provides a sensible contingency. With only a few months left until the extension deadline and so much unknown about COVID-19, it would quell fears of a second economic slump caused by a no deal exit. While a backlash is likely – as Brexit will have dragged on for almost 5 years – this international emergency cannot be allowed to facilitate a crash out of the EU. Every effort should be made to reduce the market impact of leaving. It also reminds us of the importance of working with neighbouring countries in order effectively manage crises, particularly the European Medicines Agency. In terms of economic relationships, potential loss of further EU trade from a no-deal Brexit at the end of the year could spell disaster when the UK economy will be in a state of recovery. We do not know when the market will bottom out, but for investors with the luxury of time, market wisdom suggests economic recovery will follow. Consumer confidence is likely to return once the COVID-19 threat has abated, if economic order can be restored. While the government must act in line with health experts to limit contagion, alongside the Bank of England it has a role in maintaining economic stability in these volatile times. This includes the prudent measure of extending the Brexit deadline as a contingency.

Full article on LSE blog

© LSE