: Brexit is taking its toll on the UK financial system as commerce with the EU falls sharply

The UK economy contracted less than expected in January, but trade with the European Union fell sharply after the end of the Brexit transition period earlier in the year, figures from the Office of National Statistics showed on Friday.

Exports of goods to the EU decreased by 40.7% and imports by 28.8% compared with December. This was by far the largest decrease since comparable figures were started to be recorded in 1997.

In comparison, exports to non-EU countries increased by 1.7% and imports from the same group only increased by 17.6%.

Great Britain left the EU internal market and its customs union on January 1st.

The ONS also said its gross domestic product contracted 2.9% in January, well below an analyst consensus forecast of 4.9%.

In addition to shrinking trade, the decline in GDP is mainly due to the COVID-19 pandemic restrictions on economic activity, including school closings, imposed shortly after the New Year.

The impact on services and manufacturing was partially offset by a significant increase in healthcare spending due to the nationwide introduction of a test and trace system.

The outlook: Expect GDP to pick up from March after a successful vaccination campaign starts, followed by the gradual reopening of the economy. However, the trade figures seem to show that the border problems are more than the government-shrugged “teething troubles” of Brexit.

The real trade collapse may not be as big as the January numbers show, as inventories piled up in December as companies seriously prepared for Brexit. The paperwork and compliance issues businesses face when moving goods across the border are expected to ease in the coming months.

However, more and more companies are also developing new supply chains in order to avoid the costs caused by Brexit. The magnitude of the decline in UK exports to the EU gives an idea of ​​the economic price to be paid for increasing trade breaks with what is by far the largest market in the country.

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