Opinion: Brexit delay will keep fog of uncertainty hanging over UK economy

Bexit uncertainty has been a drag on the economy. The International Monetary Fund thinks most of the damage it estimates will occur as a result of Britain’s decision to leave the EU has already happened.

For obvious reasons, investment has been particularly weak with businesses reluctant to commit to new capital projects until they have a better idea what the future holds.

As a matter of logic, therefore, the fresh delay to the Brexit process – unless it is short-lived – means more uncertainty and weaker activity. Investment plans will remain mothballed. Construction sites will go into hibernation for the winter. Retailers, with their busiest time of the year coming up, will have every reason to be worried about how sales will hold up.

Quantifying the scale of the damage is impossible until the length of the delay is known. But on the assumption that it will be the end of the year at the earliest before the Brexit fog lifts, certain conclusions can be drawn.

First, the calling of an election before Christmas will require a dissolution of parliament in the next couple of weeks and so deprive Sajid Javid of his opportunity to deliver a voter-friendly budget on 6 November. Second, the pound is likely to weaken in the currency markets. Its recent rise has been due to increasing confidence that a Brexit deal by the end of October deadline was becoming more likely.

A delay plus a general election means both economic and political uncertainty. It is hard to see the pound going above $1.30, easy to imagine it sinking back to $1.25.

Finally, it seems inevitable that the Bank of England will downgrade its growth forecast in its upcoming quarterly inflation report, due out at the start of next month. The only real question is whether Threadneedle Street’s monetary policy committee feels the need to give the economy a boost with a quarter-point cut in interest rates. That still looks unlikely but the chances of it happening have certainly increased.

Larry Elliott is the Guardian's economics editor.

Read his article in full in The Guardian