Britain faces a one in three chance of recession even if there is an orderly Brexit, the Bank of England has warned, as it slashed its forecasts for economic growth over the coming year but held interest rates steady at 0.75 per cent.
And a no-deal Brexit would mean even slower growth, a further hit to the value of sterling and rising inflation, the central bank forecast.
Governor Mark Carney issued the stark warning as the pound continued to plunge, reaching its lowest level against the dollar in two and a half years, while other data showed a sharp decline in UK manufacturing.
The bank’s intervention came after a week in which Boris Johnson has repeatedly clashed with European Union leaders and appeared to raise the prospect of the UK leaving the EU without a deal.
It sparked calls for the prime minister to rule out no deal, to prevent what one senior MP described as an economic “tsunami” threatening the country.
Labour said that the picture painted in the bank’s August 2019 inflation report showed that the Conservatives had been “utterly incompetent in managing the economy”, while Liberal Democrats said it confirmed that “any form of Brexit will weaken our economy”.
Financial markets around the globe are already pricing in the significant probability of the UK leaving the EU without a deal later this year.
But the bank is required to draw up its forecasts on the assumption of an orderly departure with a deal in October, in line with stated government policy.
On this basis, it cut its growth forecast for both this year and next to 1.3 per cent, which would mark the weakest rise in GDP since 2009, when the economy was still reeling from the financial crisis.
And it said there was a 30 per cent chance that growth in the year to the first quarter of 2020 will be negative.
UK manufacturing contracted at its fastest pace for almost seven years in July, according to the closely watched survey of purchasing managers in the sector. Brexit turmoil was blamed for the fall, alongside a world economy undermined by trade tensions. On this measure, UK manufacturing has now shrunk for three consecutive months.
Downing Street and the Treasury declined to respond to Mr Carney’s comments, citing the need to respect central bank independence.
But Peter Dowd, shadow chief secretary to the Treasury, said the inflation report gave “a bird’s eye view of the mess the Tories have made of our economy, with slumping business investment, weak productivity, stagnant pay, and stuttering growth”.
And Liberal Democrat Treasury spokesman Chuka Umunna said: “It is perfectly clear Brexit is already harming our economy: the manufacturing sector is nearing record lows and the pound is trapped in stark decline. How can the Tory government claim they can end austerity and grow the economy when their policy of Brexit is pushing it to the brink?
“The Liberal Democrat message is now more urgent than ever: give the people a final say, stop Brexit, and with the country back on track, fix the economy. Stopping a no-deal Brexit is vital, but stopping Brexit altogether must be the goal.”
Labour MP Rachel Reeves, the chair of the House of Commons Business Committee, said it was “pure recklessness” on the part of the government that it had not ruled out no deal.
The £2.1bn committed by Sajid Javid, the chancellor, to no-deal preparations on Wednesday should be spent on reversing benefit cuts and investing in schools and hospitals, “not shoring up the defences against a tsunami”, said Ms Reeves.
Minutes of the Wednesday meeting of the bank’s Monetary Policy Committee, released at the same time as the forecasts, showed that the MPC had voted unanimously to keep interest rates unchanged at 0.75 per cent.
“The MPC judges that underlying GDP growth is likely to remain subdued over the coming year, with Brexit-related uncertainties weighing on spending to a greater extent than in May,” the BoE said.
Speaking to reporters, Mr Carney pointed out that business investment – which accounts for just over 9 per cent of Britain’s GDP – remains low both historically and compared with other countries.
Even if there is an orderly Brexit, “some of that [investment] will not come back – the opportunity has been lost”, he said.
Pointing to another constraint on investment that is likely to persist beyond October, he noted that in recent months companies have grown less certain about Britain’s future trading relationship with the EU, with a long-term free trade agreement likely to take “some time” to negotiate.
“So they’re looking for clarity about that future relationship … and trade deals do take a long time to actually negotiate. We have to get from the no deal to deal, but then turning the deal into actual [trade agreement] may take some time,” he said.
The bank admitted “an inconsistency” between its assumption of a smooth Brexit and market prices, which also affect its forecasts and which reflect greater pessimism.
“A more consistent forecast would therefore have somewhat lower paths for GDP growth and CPI inflation,” the BoE said.
It forecast that consumer price inflation would rise above its 2 per cent target in two years’ time.
If there is a no-deal Brexit, the pound will fall, inflation rise and GDP growth will slow.
MPC member Ben Broadbent said the expected decline in the value of sterling would take several years to feed through into inflation on the high streets.
But he warned that in some areas, such as petrol and food, prices tend to react “quite quickly”.
Speaking alongside Mr Carney, he said: “About 30 per cent of what we consume [in the UK] is imported, either directly or indirectly.”
The bank restated its position that interest rates could be raised or lowered in response to difficulties arising from Brexit.
But Mr Carney warned there are “limits” to what it can do to support the economy.
Monetary policy cannot offset the effects of shocks such as Brexit but it can help smooth the economy’s adjustment to these shocks, he said.
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