The governor of the Bank of England has said the long-term economic impact of a no-deal Brexit would be worse than scarring effects of COVID-19.
Andrew Bailey told MPs on the Treasury Select Committee that the failure to reach a trade deal between the EU and UK would do more damage to UK GDP growth than the pandemic over the long term.
“The long-term effect I think would be larger than the long-term effect of COVID,” Bailey said during a virtual hearing on Monday.
The governor was asked about about analysis by the London School of Economics, published in August, that suggested a no deal Brexit would cut UK GDP growth by 8% over 15 years. The long-term impact of COVID-19 was found to be closer to 2%.
Bailey broadly agreed with the analysis and said it was “in the best interest of both sides for there to be a trade agreement.”
While COVID-19 has deal a historic shock to the economy in terms of speed and size of GDP decline, economists at the Bank of England expect activity to bounce back relatively quickly once restrictions are eased and a vaccine becomes widespread.
By contract, the impact of a no-deal Brexit would likely be more of a slower burn. Tariffs would be introduced and trade would reduce due to increased paperwork, but this would take longer to impact the real economy.
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“It takes a much longer period of time for the real side of the economy to adjust to the change in openness and the change in the profile of trade,” the governor told MPs.
Bailey cautioned that trade would likely be disrupted in the short term whatever the outcome of trade talks.
“There is no such thing as a frictionless deal… anything involves change,” he said.
The governor said disruption could be minimised if both sides adopt changes with “the spirit of goodwill” but said this would be less likely if both sides fail to strike a deal.
“Unfortunately, it’s probably a reasonable assumption that if we end up in that place the spirit of goodwill will be less,” Bailey said.
UK and EU negotiators are in the final stages of thrashing out a trade deal ahead of the end of the Brexit transition period on 1 January 2021. Reports suggest UK Prime Minister Boris Johnson will intervene to talk directly to his European counterpart Ursula von der Leyen to break the ongoing deadlock.