Bank of England: Brexit will weigh on UK economy 2021

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·2 min read
Lorries line up at Frontier control barriers for departure inside the Eastern Dock of the Port of Dover is where the cross channel port is situated with ferries departing here to go to Calais in France on the 29th of September 2020, Dover, Kent, United Kingdom. Dover is the nearest port to France with just 34 kilometres (21 miles) between them. It is one of the busiest ports in the world. As well as freight container ships it is also the main port for P&O and DFDS Seaways ferries.  (photo by Andrew Aitchison / In pictures via Getty Images)
Lorries line up at Frontier control barriers for departure inside the Eastern Dock of the Port of Dover is where the cross channel port is situated with ferries departing here to go to Calais in France on the 29th of September 2020, Dover, Kent, United Kingdom. Photo: Andrew Aitchison / In pictures via Getty Images

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.

READ MORE: Businesses have 'head in the sand' over Brexit preparation

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.

WATCH: What happens if no Brexit trade deal is struck?

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.”

READ MORE: Bank of England to pump another £150bn into UK economy

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.