Warning of Brexit hit to UK’s post-COVID recovery

Brexit could cost the UK economy 2.9 percentage points in 2021, bringing GDP growth down to 7.2% next year, according to forecasts by KPMG. Despite new analysis finding that an early COVID-19 vaccine could see growth momentum accelerate from early next year, Brexit could hamper the UK’s recovery, bringing GDP growth down to 7.2% in 2021.

The manufacturing sectors hardest hit by Brexit, including textiles, chemicals and electrical manufacturing, could see output at the end of 2021 between 6% and 12% lower than in Q4 2019. KPMG says this is down to bottlenecks in supply chains, border frictions and falling investment, as well as the ongoing fallout of the pandemic. Uncertainty and loss of access to the EU market for the UK’s financial services sector could lead to 10% lower output over the same period, while the UK economy as a whole is not expected to reach pre-COVID levels until the end of 2022.

The analysis makes certain assumptions about the next few months, specifically that a slimmed-down Brexit deal is agreed by year-end, which excludes services, and a vaccine is ready to be rolled out early next year, which brings about the end of social distancing restrictions by late Spring.

Yael Selfin, chief economist at KPMG UK, said: “The impact of Brexit will single the UK out among advanced economies next year. While the Government will need to address the short-term needs of businesses as they cope with the transition to a new trading relationship, it is also important that it increases investment in the infrastructure and skills that will be needed in order to alleviate the longer-term impact Brexit will have on productivity and growth.”

KPMG’s data suggests that the ongoing efforts to contain the second wave of the pandemic across the UK could cause a milder than expected 2% fall in GDP in the current quarter, leading to an 11.2% contraction in output for 2020. While the extension of the Job Retention Scheme has potentially held off a sharp increase in unemployment this year, mounting losses and business closures could push the unemployment rate to peak at 7.8% in May next year before gradually subsiding as the economy continues to recover.

“While we can hopefully see the light at the end of the tunnel when it comes to the COVID-19 pandemic, there are further challenges ahead for the UK economy,” added Selfin. “Brexit and changes to working, communicating, and shopping habits reinforced by the pandemic will require all of us to adjust to new realities.”

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