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Economists see Brexit stall continuing despite second extension from EU

Brexit is on course to be delayed until the end of October under a plan to avoid a chaotic no-deal split.

The European Union granted the U.K. a second extension to the Brexit deadline early Thursday that will last on a flexible basis until Oct. 31, averting the prospect of a no-deal Brexit on Friday.

The U.K. has avoided a hard Brexit for the second time after extending the original deadline set for March 29. The U.K. will, however, under the new extension have to take part in the elections to the European Parliament, which are taking place between May 23 and May 26, and will enjoy full EU membership in the extension period. However, at any point the U.K. can accept the withdrawal agreement and exit the single market.

Prime Minister Theresa May appeared in front of U.K. members of Parliament on Thursday, relaying the outcome of the EU summit Wednesday, which resulted in EU leaders asking the U.K. to update rest of the trading bloc on Brexit progress in June.

Ms. May reiterated Thursday that she was supportive of the U.K. leaving the European Union — despite the extension — as soon as possible but said that the extension requires "the U.K. to hold European elections."

"The date of the departure remains in the hands of this house (of Commons)," she said, adding that "the talks with the opposition will continue later today."

Ms. May has been discussing with opposition leader, Labour's Jeremy Corbyn, a way forward from the Brexit impasse after her deal was rejected by U.K. MPs three times. "Talks are taking place and are serious," Mr. Corbyn said in response to Ms. May's speech.

But he called out Ms. May's on mishandling Brexit, which has led to the U.K. having to hold European elections. "Members of European Parliament (will) not know if they will take a seat or for how long," he said.

The pound sterling fell 0.05% vs. the dollar on Thursday afternoon to $1.30, while the FTSE All-Share index rose 0.08%.

Responding to the news, Azad Zangana, senior European economist and strategist at Schroders, said in an emailed comment: "Looking ahead, while more time is preferable to a no-deal Brexit for the economy and for the pound, the lack of conditions in granting the extension has weakened the incentives for the U.K. Parliament to find a resolution."

"Overall, we struggle to see what will break the impasse. There is a high probability that the June review will demand more urgent action, before another emergency EU summit at the end of October to grant another extension," he added.

Mr. Zangana added: "Meanwhile, the economy continues to struggle. Business surveys suggest a weak growth environment, with most activity being dominated by inventory building in preparation for Brexit, rather than the servicing of current demand. At some point, stockpiling will reach its limit, and output will start to slow to match the weaker growth in consumption and investment."

Silvia Dall'Angelo, senior economist at Hermes Investment Management, said in a separate emailed comment: "The flexibility embedded in the extension — allowing the U.K. to exit before the new (Oct. 31) deadline if a solution is achieved earlier — creates an incentive in this direction. However, positions are far apart and well entrenched, so it looks more likely that the stall will persist in coming months, and a more decisive change will be needed to break the mold. In particular, a government crisis and early general election are quite possible, which would bring the Brexit debate back to square one, with all options back on the table — including a no-deal outcome."

"For the time being, the only certainty is that the extension means more uncertainty for longer. That will continue to weigh on business decisions — notably on investment — in turn resulting in sluggish economic growth and poor prospects for an already depressed productivity performance," she added.