UK recovery continues but risks loom, notably over Brexit

Economists think the pace of the recovery will moderate following of a recent pick-up in new virus infections

July's increase means that the British economy has now grown for three months in a row in the wake of April's dramatic 20% slide. Overall, the British economy remains 11.7% smaller than it was in February before the full economic impact of the pandemic was felt.

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Economists think the pace of the recovery will moderate following of a recent pick-up in new virus infections that has seen the re-imposition of lockdown restrictions on social gatherings, for example.

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The looming end of a salary-support scheme and heightened uncertainties over a trade deal between the U.K. and the European Union are also expected to weigh on growth and, as a result, most economists think the economy will end the year around 8% smaller than it was before the pandemic.

“We’re likely to see the pace of expansion slow in August and September and stall as we head into the winter as the ‘mechanical rebound’ ends and unemployment rises,” said James Smith, developed markets economist at ING.

Concerns over a post-Brexit deal have become a particular concern over the past few days amid a souring in relations between the U.K. and the EU. The announcement from the British government that new legislation breaches elements of the withdrawal agreement, which allowed for the country's smooth departure from the bloc at the start of the year, has prompted a furious reaction from the EU and raised the prospect of an imminent collapse in the talks.

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Even before the current standoff, the trade discussions had made very little progress, with the two sides seemingly wide apart on several issues, notably on business regulations, the extent to which the U.K. can support certain industries and over the EU fishing fleet’s access to British waters.

The EU has been particularly insistent on ensuring that British-based businesses don’t have an unfair advantage as a result of laxer social, environmental or subsidy rules in the U.K.

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British businesses are worried about a collapse in the talks that could see tariffs and other impediments slapped on trade with the EU at the start of next year. Most economists think that the costs of a “no-deal” outcome would fall disproportionately on the U.K.