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Press release

Brexit – out of sight, out of mind?

Munsbach, the 9th of October 2020 — Brexit? Yes, actually, there was something else. The coronavirus pandemic – and no doubt also some signs of fatigue due to the never-ending issue – has pushed news about the progress of the Brexit negotiations into the background. However, with the end of the year approaching, and consequently the end of the negotiations, and as a result of daring political manoeuvres on the part of British Prime Minister Boris Johnson, the issue has recently been moving back into the limelight.

Johnson wants the details of the exit agreement to be negotiated by 15 October. But on the political level, Brexit is likely to continue to cause a great deal of trouble beyond that date. Both the outcome of the negotiations and the final design of the exit agreement are impossible to predict and can only be speculated about. However, we can talk in more concrete terms about the current state of the British economy. Given the fact that Brexit in any form is likely to have an impact on it, it is worth taking a closer look.

Poor use of a good starting position

Before the coronavirus crisis, the British economy was in good shape. Solid figures, solid growth, low new debt - the UK appeared to be as stable as Germany. However, the coronavirus, or rather a misguided coronavirus policy adopted by the government, changed this dramatically. Effective measures were taken far too late and a reopening of the economy was too slow. While many countries in the eurozone have regained some degree of economic momentum, Britain is lagging behind. At the same time, due to a massive increase in new infections, it faces the prospect of having to rein in the economy once more before it can really pick up speed.

Economic output in the second quarter fell by 20.4 percent compared with the previous quarter. This is a remarkably poor performance and well below that of the eurozone, where we saw a drop of 12.1 percent over the same period. For us, this discrepancy was clearly due to a misguided policy to contain the coronavirus and not a result of the Brexit negotiations being in a state of limbo.

In addition, on two occasions in March 2020, the Bank of England reduced its base rate from 0.75 percent to 0.1 per cent. Although there are valid reasons for these steps, they also mean that the central bank has already used up some of its ammunition should it want to take further interest rate steps to curb any negative effects of Brexit. In the wake of these interest rate steps and the Brexit uncertainties, the UK issued 6-month negative yield bonds for the first time. We, along with many other market observers, expect the base rate to fall further into negative territory. This could even be quickly lowered to -0.5 percent, particularly in the event of a hard Brexit.

British economy already struggling

Furthermore, a rise in the unemployment rate, further job losses - particularly in the retail and entertainment sectors - and tighter standards for lending to home buyers are clear signs that the UK economy is already experiencing significant problems. The coronavirus pandemic has significantly reduced both the central bank's room to manoeuvre and the government's ability to act. On the one hand, the central bank and the government are already on alert and the adoption of support measures should meet with little resistance. On the other hand, however, the question arises as to whether these measures will have too little effect in the context of a continuing pandemic.

Will the coronavirus-related lockdown and the ensuing economic collapse in the EU and the UK change the outlook for the Brexit negotiations? Probably not. While it could be argued that the difficult economic situation should drive the negotiators to reach an amicable agreement, there is an opportunity for UK policy makers to blame the consequences of failed Brexit negotiations on the effects of the coronavirus crisis. Who could prove otherwise?

Irrevocable setback?

We should note the following: Great Britain was in a better-than-average position to cope with the coronavirus pandemic. These advantages were carelessly squandered. At first, the government refused to impose the necessary lockdown, only to ultimately order an even more far-reaching and longer-lasting lockdown than many neighbouring countries. Many indicators suggest that the economic situation is very serious. The central bank has already used up some of its resources.

If a hard (or harder) Brexit is now added to this, the result could be a very volatile combination. The economic and political consequences are difficult to predict. What is clear, however, is that Britain will lose ground, particularly in relation to the EU. From the outset, many saw the decision to leave the European Union as a historic mistake. The coronavirus pandemic, the completely failed policies of the Johnson administration, and Brexit could now be an irrevocable setback for Britain.