Britain's economy now 'stretched to the limit' by double threat of Brexit and Covid

Struggling business face a further six months of hardship following government's new coronavirus restrictions

Police officers wearing protective face masks walk through Waterloo station, during the morning rush hour, amid the coronavirus disease (COVID-19) outbreak, in London, Britain, September 23, 2020. REUTERS/Hannah McKay
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Britain’s double challenge of Brexit and the fight against Covid-19 will weigh on the country’s economy for months and years to come, analysts warn, as businesses face a further six months of hardship following new government restrictions.

Under the latest package of coronavirus directives, restaurants and pubs must shut by 10pm every night and office workers are urged to work from home. Separately, trade talks with the European Union have run into difficulties after the UK wanted to pass a domestic law allowing it to override part of the EU Withdrawal Agreement signed last year.

Without an EU trade agreement in place, the UK would face enormous structural headwinds, which would push the currency significantly lower.

“The UK faces the simultaneous challenges of Brexit and Covid-19. Either would stretch any nation’s economy to the limit,” said Stephane Monier, chief investment officer at Lombard Odier Private Bank.

“The uncertainties surrounding the two, and basic nature of any initial deal with the UK’s most important trade partner, will weigh on the country’s economy in the months and years ahead.”

Struggling businesses were just getting back on their feet after the UK’s first national lockdown saw the country slip into its first recession since 2009 in the second quarter of this year, posting a record 20.2 per cent contraction in the gross domestic product. The UK economy was “disproportionally hurt”, said Mr Monier with GDP in the eurozone falling by a record 12.1 per cent over the same period.

Britain's unemployment rate jumped above 4 per cent in the second quarter of the year as the effects of the Covid-19 pandemic took hold, according to the Office for National Statistics – the first increase since the coronavirus lockdown began in March.

With the new tranche of coronavirus restrictions set to last until spring 2021, chancellor Rishi Sunak is now under pressure to set out how the government will protect jobs and support businesses through the crisis as the government's support programmes are set to send on October 31.

Mr Sunak is considering replacing the furlough scheme with German-style wage subsidies, according to British media reports, as part of a wider emergency support package to help businesses survive a second wave of the virus.

The Treasury has been consulting on a wider support package that would combine an extension to the government's loans programme with a range of other measures.

More than £57 billion (Dh265.8bn) has been borrowed by companies since March, with the Treasury guaranteeing 80 per cent of the value of the loans.

“Lots of businesses will not survive this and we are going to see more and more people lose their jobs unless we have the support to counterbalance these restrictions,” said Kate Nicholls, chief executive of trade body UK Hospitality. “The Government must immediately announce an exhaustive package of financial support, otherwise our sector is facing ruin.”

Bank of England Governor Andrew Bailey said on Tuesday that he supports more targeted support to replace the furlough scheme.

However, business groups warned that many jobs would be lost and companies would go to the wall if more government help is not forthcoming.

“Many businesses ­- particularly those at the heart of our night-time economy and events industries - are now seriously fearing for their futures," said Mike Cherry, national chairman of the Federation of Small Businesses

In addition to Covid, a no-deal Brexit at the end of this year may deepen the damage to the UK economy, a study from the think-tank UK in a Changing Europe, which collaborated with the London School of Economics, found.

The negative impact on gross domestic product would be 5.7 per cent over the next 15 years compared with the current level, while GDP was only forecast to take a 2.1 per cent hit from Covid-19 over the same period, the study found.

Lombard Odier’s Mr Monier said the UK’s currency is beginning to reflect the threat of a no-deal Brexit, with the pound “unlikely to appreciate further until even a very basic agreement with the EU is close”.

“Without an EU trade agreement in place, the UK would face enormous structural headwinds, which would push the currency significantly lower," he said. "We would expect the pound-dollar to trade in the lower end of $1.10 to $1.20 range, while euro-sterling would approach parity.”

The pound extended its decline to a two-month low on Wednesday as investors fretted over the possibility of a new lockdown in Britain.

The currency declined as much as 0.4 per cent to $1.249 at 9.34am UK time after Foreign Secretary Dominic Raab said he could not rule out a nationwide shutdown.