By Xavier Fontdegloria 
 

The European Commission slashed its growth forecasts for the U.K. for this year due to the lockdown measures to contain the coronavirus pandemic and the uncertainty about its future relationship with the European Union.

The U.K. will face a deeper recession than previously thought, according to the summer forecasts released Tuesday. The country's economy will shrink by 9.7% this year, more than the 8.3% contraction estimated in March. The rate is one percentage point lower than the 8.7% expected for the eurozone.

The Commission said the UK economy likely contracted by 18.2% in the second quarter, more than any member of the eurozone.

"The lockdown has led to a sharp slowdown in business activity in many sectors, particularly the hospitality sector, construction, and arts and entertainment. Private consumption and business investment are also projected to fall significantly," the report said.

The rebound in the second half of the year, however, is expected to be stronger than on the continent as lockdown measures are further eased and the expansionary fiscal stance and supportive monetary policy supports the recovery.

The Commission left unchanged the U.K.'s growth forecasts for next year at 6%, but it warned the projections for 2021 are based on the technical assumption of status quo in terms of trading relations between the EU and the U.K.

"Business investment is expected to catch up more gradually due to pressure on balance sheets as a consequence of the Covid-19 pandemic and the continued uncertainty about future of EU-U.K. trading relations," the report said, adding that the risks to the 2021 forecast are "predominantly to the downside".

"It is possible that the transition period ends without any agreement on the future trading relationship", the report said.

Even if a trade agreement between the EU and the U.K. is concluded, it says, the future of the trade relationship will be less beneficial than the current one. "It will lead to more negative outcomes for both sides, in particular for the U.K. for which trade with the EU is more important than trade with the U.K. for the EU," the report says.

 

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

 

(END) Dow Jones Newswires

July 07, 2020 06:47 ET (10:47 GMT)

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