The threat of a no-deal Brexit is back — and with it the risk that the U.K. economy’s shaky recovery from the coronavirus pandemic will be hobbled.
As British and European Union negotiators head into the last round of talks scheduled before a key summit this month, chances are growing that the U.K. will end the post-Brexit transition period on Dec. 31 without a free trade agreement in place — spelling turmoil for businesses.
Instead of postponing its final parting with the bloc because of the coronavirus, the U.K. government has so far ruled out any delay. That may be, critics say, because Brexiters calculate the cost of leaving without a deal will be obscured by the far more extensive damage wreaked by the virus.
To Sanjay Raja, an economist at Deutsche Bank AG, a no-deal Brexit would halve the pace of growth next year to 1.5 per cent. The U.K. in a Changing Europe, a research group, estimates gross domestic product could be crimped by eight per cent over 10 years as trade barriers and a reduction in productivity hit output.
“It may be less politically costly for the U.K. to do no deal in the midst of a pandemic, but economically I’m not sure about that at all,” said Jonathan Springford, deputy director of the Centre for European Reform. “It might be that they’re able to get away with it — but I don’t think it changes the view that no deal would impose quite sizable economic costs.”
Citigroup Inc. says the size of the shock could even force the Bank of England to take the controversial move of cutting interest rates below zero because fiscal policy and other tools may not be enough.
Companies now have to think of how to prepare for Brexit while dealing with the fallout from coronavirus. Many are shuttered, indebted and struggling to pull through the lockdown.
The additional debt firms are carrying will make adjusting to Brexit more difficult, according to Alan Winters, director of the U.K. Trade Policy Observatory at the University of Sussex.
The re-introduction of trade barriers with the EU and changes to trading relationships with other countries will require a major re-orientation of exports, he wrote late in May. Heavily indebted firms are less likely to invest in developing new export markets.
“It’s a tense conversation at the moment,” said Allie Renison, head of Europe and trade policy at the Institute of Directors. “Companies are struggling with their survival, and there’s not a narrative yet from government saying to prepare, but they are saying the transition is ending.”
While both the U.K. and the EU insist a deal is still their preferred outcome, the deadlocked talks and the limited time left available mean risk no agreement will be reached is rising: analysts at Eurasia Group now put the odds of that outcome at 55%. EU Trade Commissioner Phil Hogan told RTE last month that the U.K. “can effectively blame Covid for everything.”
If the sides can’t strike a deal by the year-end, the U.K. will default to trading with the bloc on terms set by the World Trade Organization. That means British manufacturers of goods such as cars, pharmaceuticals, plastics, and precision tools could face new costs and significant disruptions to their just-in-time supply chains in Europe.
For Patrick Minford, chair of the pro-Brexit group Economists for Free Trade, leaving on anything but WTO terms would mean Britain would “lose the gains of free trade with the rest of the world.” It’s also better that the U.K. stays out of the EU’s expensive coronavirus recovery plan, he said. “When you add them both up, it’s pretty serious, really, and we’re much better off leaving.”
The fracturing of supply chains due to the coronavirus is one wake-up call to the upheaval that could be on the way. More than 80% of small and medium-sized manufacturers say the pandemic has affected their supply chains, and while some say contingency plans for Brexit have proved useful in preparing for the situation, others are facing shortages.
The pandemic has also led to discussion of bringing supply chains closer to home, particularly as the U.K. struggled to fly in emergency supplies while factories were closed and most workers stayed away.
U.K. Cabinet Office minister Michael Gove last week touted the “phenomenon of re-shoring” and said “we’re seeing how countries can increase resilience.”
But moves to shorten supply chains further could likely lead to goods becoming more expensive, according to Springford of Centre for European Reform. What is more, the U.K.’s geographical proximity to the EU means it’s likely to stay an important trade partner.
Philip Hammond, a former U.K. finance minister who campaigned to stay in the bloc, said last week that the government should at least seek a temporary trade deal to protect jobs.
Since the U.K. is such an open economy, “we will be more exposed than most developed economies to any headwinds in international trade during the recovery,” he said. “We really can’t afford to layer on top of that, during a very difficult recovery period, a sort of self-inflicted shock.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
