The governor of the Bank of England, Andrew Bailey, has warned that the economic cost of a no-deal Brexit would be bigger in the long term than the damage caused by Covid-19.
Bailey said failure to agree to a deal before the Brexit transition expires at the end of December would cause disruption to cross-border trade and damage the goodwill between London and Brussels needed to build a future economic partnership.
Speaking to MPs on the Commons Treasury committee, he said the fallout from the pandemic and the second national lockdown in England was having a much bigger short-term impact on the economy. However, “the long-term effects, I think, would be larger than the long-term effects of Covid. But … it would be better to have a trade deal, yes, no question about it.”
With little more than a month before the transition period ends, a trade deal between London and Brussels is close to being finalised, although officials have warned that the risk remains of an accidental no deal if compromises cannot be reached.
Over the weekend, the chancellor, Rishi Sunak, said that Britain should not accept a deal with the EU at any price, insisting that Covid-19 posed a much greater threat to the economy than a no-deal scenario. Sunak said a deal was preferable but that the UK would “prosper in any eventuality”.
However, Bailey said it was in the “best interests of both sides, for the UK and the EU, for there to be a trade agreement”.
It comes after analysis by the London School of Economics and UK in a Changing Europe concluded in September that the long-term economic impact of a no-deal Brexit could be two or three times worse than that of the pandemic.
Asked about the research, Bailey said economic models suggested there would be long-term consequences, as it could take a long time for the UK to adjust to a new trading relationship. “It takes a much longer period of time for the real side of the economy to adjust to the change in openness and change in the profile of trade,” he said.
The fallout from Covid-19 and lockdown measures sunk Britain’s economy into the deepest recession on record this spring, with a 20% drop in gross domestic product (GDP) in the second quarter.
With the economy under continued pressure amid the second Covid wave, despite a rapid recovery this summer, Threadneedle Street estimates that the pandemic will cause persistent scarring over the long term, with total economic output about 1.75% lower than would otherwise have been the case by the end of 2023.
No-deal Brexit would not cause as much damage as inflicted by the pandemic earlier this year. However, the LSE modelling estimates a reduction in GDP worth 8% over a decade compared with remaining in the EU.