(More Bank opinion) – When Britain decided to leave the EU in June 2016, most economists expected a sharp deceleration of the country's economy. The slowdown has finally arrived.

The sudden drop in economic activity at the end of 2018 raises stakes for the British political class, which tarnished its future relations with the EU while the UK enjoyed relatively favorable economic prospects. This also raises questions for the Bank of England, which is rather optimistic about the country's future, before making a brutal U-turn last week.

The economy grew 0.2% in the last quarter of last year, which is slightly below expectations. But it contracted by 0.4% in December. Although it may be a mere shock, it may also indicate that the worst is yet to come.

The decomposition of the overall figure is also disturbing. Business investment – which is highly vulnerable to uncertainty – was down 3.7% from the previous year, the fourth consecutive quarterly decline. And while the country's dominant service sector was holding up, both industrial production and the manufacturing sector were shrinking. These are precisely the areas that could be expected most in the event of disruption of trade and supply chains.

The British deceleration supports the position of most economists who have warned against the fallout of Brexit since the referendum campaign. It is fair to say that this was not obvious in the aftermath of the vote, when the Bank of England, the International Monetary Fund and others were too pessimistic. Business leaders have not behaved like the hyper-rational agents populating the economics textbooks. Many were waiting to see if the fog of Brexit would dissipate quickly and continue their activities as usual. As the March 29 deadline is fast approaching and the chances of turning back on Brexit are diminishing, fewer and fewer people want to take risks. Economists who said unfortunate were wrong to choose the moment, but probably not on the bottom of their predictions.

It is hoped that the slowdown in the British economy should awaken Theresa May's conservative government and the opposition Labor party. A month and a half after Brexit, we still do not know what the British Parliament wants. The agreement reached in May with the EU, which would trigger a smooth transition and give businesses more time to adjust, was completely overtaken in Westminster. The nascent optimism is that a version of his contract will be dragged online, but everything depends on the extraction of concessions from Brussels, the victory of conservative lawmakers Brexiter and work with an opposition led by the extreme left. If this fails, we consider the possibility of a departure without agreement. No wonder companies are scared.

Until now, British politicians have had the luxury of being able to get by without London being burned. Admittedly, the pound has fallen sharply. But the UK has not suffered traumatic movements that have endangered other countries such as Greece and Italy when negotiating with Brussels. A slowing economy would remind the British political elite of the real issues.

The technocrats of the Bank of England must also wake up. After predicting a possible recession if Britain voted to leave the EU, the Bank took a more optimistic stance. Last August, he raised rates to 0.75%, warning that the economy was reaching its "speed limit" and forecasting further increases. Last week, Governor Mark Carney was still a lot darker about prospects. According to Central Bank forecasts, Britain will avoid a recession in the first six months of the year, but there is a one in four chance of this happening. Most ominously, this prediction is valid even if there is an ordered Brexit. With a departure "without agreement", the prospects would be even worse.

One may wonder why the bank raised rates initially, while the uncertainty around Brexit was so obvious. While wages have risen decently, inflation is still above the Bank's target of 2% because of energy prices and is expected to fall further. Of course, there is no guarantee that the Bank will be forced to reduce rates in the case of a Brexit "without agreement" because it could be forced to deal with the flight of capital. But this rate hike and these optimistic discussions seem premature.

The story continues

Nevertheless, the Bank's responsibilities are insignificant compared to those of politicians – and Brexit boosters in particular. The cost is becoming increasingly clear for Britain. This will depend on the choices of the elected in the coming weeks.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@More Bank.net

To contact the editor responsible for this story: James Boxell at jboxell@More Bank.net

This column does not necessarily reflect the opinion of the Editorial Board or More Bank LP and its owners.

Ferdinando Giugliano writes columns and editorials on the European economy for More Bank Opinion. He is also an economic columnist for La Repubblica and a member of the editorial board of the Financial Times.

For more articles like this, go to More Bank.com/opinion

© 2019 More Bank L.P.