Carney Counts Brexit Cost as BOE Sees Weakest Growth in a Decade

LONDON (Capital Markets in Africa) – Brexit uncertainty is cascading through the U.K. economy, rattling households and companies, according to Bank of England Governor Mark Carney.

In its Inflation Report on Thursday, the central bank delivered a pessimistic view, with Carney warning that the “fog of Brexit” is creating tensions. Even based on a smooth exit from the European Union — which looks more unlikely as the March 29 deadline rushes closer — it still sees the economy growing at its weakest pace in a decade, a dramatic investment slump and weaker pay gains.

The U.K. is now just 50 days away from leaving the European Union, and an agreement for its new relationship has yet to be settled. The probability of a no deal-no transition exit has increased, Carney said, warning that the economy isn’t ready for such an outcome and that it puts the U.K. at risk of a contraction.

As the clock ticks down, the slump in investment highlighted by the bank has already become a reality for some. Earlier this month, Nissan scrapped plans to build a new model in Sunderland, citing the U.K.’s split from the EU, while Airbus, which makes wings for commercial aircraft in Britain, has also made threats to switch future investment elsewhere.

“It’s now crunch time,” said Rain Newton-Smith, chief economist at the Confederation of British Industry. “A no-deal scenario must be taken off the table because the economy is seizing up from uncertainty.”

The BOE is the latest central bank to take a downbeat turn this year, after recent dovish statements from the U.S. Federal Reserve and European Central Bank. The bank now forecasts growth of 1.2 percent this year, more pessimistic than the European Commission and the National Institute of Economic and Social Research.

What Our Economists Say…
“The Bank of England served up a dovish surprise with its revised forecasts today. We now think the central bank will be reticent to move until it knows for certain that any near term weakness has dissipated.”
— Dan Hanson, Bloomberg Economics. Read more here

The downgrade from 1.7 percent predicted three months ago is the biggest since the 2016 referendum, while the probabilities surrounding the BOE’s outlook suggest there’s a slightly greater than 20 percent chance of a U.K. recession this year.

The mounting gloom comes as heightened Brexit uncertainty collides with a weakening global backdrop. On Thursday, officials particularly highlighted the impact of China’s slowdown and said trade wasn’t contributing as much to growth as they expected.

BOE officials also lowered their outlook for pay growth — currently a rare bright spot for the U.K. — for 2019 and 2020.

Mark Carney speaks at a news conference in London about the “fog of Brexit” and its impact on the economy.

The pound declined after the report was published, before erasing its losses. In the press conference, Carney stuck to his line that more rate increases will probably still be necessary.

Nevertheless, the BOE forecasts suggested that just one more quarter-point hike would be needed in the next three years to return inflation to close to the 2 percent target, down from almost three hikes seen in November. Investors now see a less-than 50 percent chance of a quarter-point rate move by the end of the year.

Acknowledging the huge impact of uncertainty, the BOE ran an analysis showing that less uncertainty would lead to much stronger growth — 1.6 percent this year and 2.2 percent in 2020.

Source: Bloomberg Business News