UK economy faces foreign capital slump with no-deal Brexit

Bank of England report says the financial system is prepared for a worst-case economic scenario

A Union flag flies from a pole atop the Victoria Tower at the Houses of Parliament in London. AFP

The Bank of England has warned markets of significant volatility and economic disruption in the event of a no-deal Brexit.

The central bank's financial policy committee, which assesses risks, said the financial sector was prepared to cope with the effects of a no-deal Brexit and would be able to keep lending.

It said preparations were made by authorities to "ensure that households and businesses will be able to use existing and new services from EU financial institutions".

But the bank said the wider economy was feeling the strain and its worst-case scenario still included a 5.5 per cent drop in gross domestic product in the event of UK crashing out.

"Entrenched Brexit uncertainties, particularly in an environment of weaker global growth, continue to weigh on economic activity in the UK," the central bank reported after its meeting last Wednesday.

This was the final meeting before the Brexit deadline of October 31, amid growing pessimism that a deal could be reached as UK and EU leaders continue to wrangle.

A British official said on Tuesday that a deal was effectively impossible because of disagreements between the EU and UK about the status of Northern Ireland.

“Brexit uncertainty is weighing on business investment, the prices of UK assets and flows of foreign capital into the UK,” the committee said.

It said commercial property was one sector that was struggling as global investors became more cautious.

With little sign of progress in negotiations, there are fears the UK could end up leaving in a disorderly manner.

Most economists believe a no-deal scenario would cause damage to the British economy as tariffs and other impediments to trade with the EU were put in place.

“Although actions by businesses and authorities have resulted in some improvement in the preparedness of the UK economy for a no-deal Brexit, material risks of economic disruption remain,” the committee said.

British Prime Minister Boris Johnson has insisted the UK will leave the EU on October 31, with or without a withdrawal agreement.

That is despite Parliament backing a bill that compels him to seek an extension to the deadline if no deal is reached at next week’s EU leaders’ summit in Brussels.

Whatever happens at the end of the month, the committee said the “core of the UK financial system including banks, broker dealers and insurance companies is resilient to, and prepared for, the wide range of risks it could face, including a worst-case, disorderly Brexit".

The central bank said financial stability was not the same as market stability and that significant volatility in some markets was to be expected in a no-deal Brexit.

Demand for UK assets, including the pound, could be expected to “fall sharply”.