The Governor of the Bank of England, Mark Carney, warned today that a majority vote to “leave” in next month’s European Union referendum carried the risk of a “technical recession” for the UK.
His words came as the Bank slashed its growth forecasts citing uncertainty created by next month's Brexit referendum – and warned, in addition, that a vote to leave could push up unemployment, send the pound plummeting and result in a spike in inflation. The Bank said that GDP in the second quarter of the year would dip to just 0.3 per cent, down from 0.5 per cent in the first quarter of the year as businesses and households reined in their spending ahead of the poll.
Overall GDP growth this year is now seen as coming in at 2 per cent, down from the Bank's previous forecast of 2.2 per cent in February's forecasts. Annual growth in both 2017 and 2018 is forecast to be 2.3 per cent, down from 2.4 per cent and 2.5 per cent respectively.
Yet the Bank's forecasts are all predicated on Britain voting to remain in the European Union in the 23 June poll. It stressed the economic impact of a vote to leave would be strongly negative in the short-term, implying that growth considerably undershot even today’s downgraded forecasts and possibly compel an emergency reduction in interest rates from the Bank.
“Of course there’s a range of possible scenarios around those directions, which could possibly include a technical recession,” said Mr Carney at a press conference. A technical recession refers to two consecutive quarters of contraction in GDP.
“Households could defer consumption, and firms could delay investment. Global financial conditions could also tighten, generating negative spillovers to foreign activity that, in turn, could dampen demand for UK exports,” he said.
The Bank also said Brexit could “cause unemployment to rise”.
The Governor’s words were seized upon by the Remain campaign as further ammunition in their campaign to persuade voters that Brexit would make them worse off. The Chancellor, George Osborne, said the Bank’s words showed that Brexit was a “lose-lose situation for Britain, either way we'd be poorer”.
The Bank did not produce any detailed forecasts for the economic damage resulting from Brexit. But research by the National Institute for Economic and Social Research (NIESR) think-tank earlier this week suggested that Brexit would depress the economy by between 1.9 per cent and 2.9 per cent relative to where it otherwise would be by 2020.
The Bank added that in the event of Brexit sterling “is also likely to depreciate further, perhaps sharply”. The value of the pound has already fallen by 9 per cent since last November. The Bank estimates that around half of that fall is due to due to traders' uncertainty about the outcome of the referendum.
Neither the Leave or Remain sides have opened up a strong lead in the opinion polls.
The Bank warned that a leave vote could force the MPC into a tough trade off between raising rates to bring down inflation and cutting them to support growth.
“Whatever the outcome of the referendum and its consequences, the MPC will take whatever action is needed to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon” it said.
The Bank said its Monetary Policy Committee (MPC) had held a joint meeting with its Financial Policy Committee counterpart on 6 April to discuss “risks to monetary and financial stability” associated with the referendum. It said a Brexit could result in a sharp drop in the willingness of foreigners to invest in British assets and “pose a major financing difficulty for the United Kingdom”.
The MPC voted unanimously today to keep interest rates on hold at their record low levels of 0.5 per cent, where they have been since 2009.
Assuming no Brexit, the Bank said “spare capacity” in the UK economy was likely to be eliminated “early next year”. Senior members of the Bank have in the past suggested that it will put up Bank rate before spare capacity is exhausted. But financial market are not pricing in an increase in the Bank rate until 2018 at the earliest.
Some MPC members have publicly mooted the possibility of a further Bank rate cut if the economy stutters, even in the absence of Brexit. But the Bank said today: “The MPC judges that it is more likely than not that Bank rate will need to be higher by the end of the forecast period than at present to ensure inflation returns to the target in a sustainable manner.”