Businesses have become increasingly cautious and postponed or canceled investment plans as they don't know what Britain's trading relationship with its main partner, the rest of the EU, will look like after Brexit. Foreign investment into the country has slumped, too — a worrying sign of a lack of confidence.
While an extension reduces the likelihood of a 'no-deal' Brexit, which would see the country crash out of the EU on Friday with likely painful economic consequences, it prolongs the uncertainty for businesses.
"There's a big difference between an extension, even a long extension, and an agreement with a transition to a known end-stage," Bank of England Governor Mark Carney said recently. "Wherever we're headed, it would serve the economy well to have a transition period to that new world."
Executives have been haunted by the same questions ever since the country voted in June 2016 to leave the EU. Will tariffs be slapped on exports? What will the rules governing the hiring of staff from other EU nations look like? What happens to the future functioning of closely linked and cross-border supply chains?
Many companies have sounded the alarm: Airbus Chief Executive Tom Enders has warned that the company could move its wing-building operations out of Britain and has condemned the uncertainty as a "disgrace;" and Jurgen Maier, boss of German manufacturing firm Siemens, has said the Brexit impasse is turning Britain into a "laughing stock." The list goes on, with EasyJet last week warning that summer bookings were being constrained by the ongoing uncertainty.
Consumers, a mainstay of British economic growth, have also become more restrained, partly because inflation rose in the wake of the 2016 Brexit vote. That led to the pound falling by around 15 percent against other currencies and import costs rising.
According to the Centre for European Reform, the British economy is 2.5% smaller than it would have been if the country had voted to remain in the EU, largely due to higher inflation and lower investment.
"The U.K. missed out on a broad-based upturn in growth among advanced economies in 2017 and early 2018 and the economic cost of the decision so far is sizeable," said CER's deputy director, John Springford.
As Britain approached its initial Brexit deadline of March 29, later delayed to April 12, much of the focus has been on the economic risks of leaving the EU without a deal. Most British lawmakers have voted against that 'no-deal' scenario amid worries that it would lead to a deep recession that would see many firms go bankrupt and unemployment turn sharply higher. The Bank of England thinks the recession will be similar to the one suffered after the global financial crisis, when the economy contracted about 6 percent.
The rest of the EU would suffer, too, if Britain crashes out on Friday with no deal. Belgium, Germany, Ireland and the Netherlands, for example, have close economic ties with Britain and would face sizeable economic shocks. While the direct impact would be more modest outside Europe, concerns about the ramifications of such an unprecedented situation would likely roil financial markets and weigh on an already weakening global economy.
With that cliff-edge looming, EU leaders, including British Prime Minister Theresa May, are meeting at a special summit Wednesday to discuss the idea of an extension. In light of her failure to get Parliament to back the withdrawal agreement with the EU, May has asked the EU to delay Britain's departure date to June 30. The EU seems to want a much longer extension to give British lawmakers more time to figure out what to do next and to not have Brexit influence voting in the European Parliament elections in May.
Experts are expecting an extension of between nine and 21 months. EU Council President Donald Tusk, who will chair the summit, has suggested about a year, though the U.K. could leave earlier if its parliament finally agrees on a way to leave the EU.
In case of a long extension, many economists think the British economy will end up faring worse than predicted this year. Most had assumed that a deal would have been secured by now and that Britain would be in a smooth transition to a new relationship with the EU.
Samuel Tombs, chief U.K. economist at research firm Pantheon Macroeconomics, says his assumption has been that Britain's EU exit deal would have been ratified by June, "unlocking some catch-up in business investment," and thereby driving growth.
"Prolonged Brexit uncertainty likely would ensure that businesses continue to hoard cash and defer capital expenditure," said Tombs, who expects growth this year to be around last year's muted level in the event of a long extension.
In Brexit, nothing appears to be ever resolved.
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