Bank of England spells out cost of Brexit to households
British households are around 900 pounds (US$1,205) worse off than they would have been had the country not voted to leave the European Union, the top central banker said Tuesday.
As Bank of England Governor Mark Carney told a committee of lawmakers, that is a “lot of money.”
Carney said the British economy is 1.5 to two per cent smaller in the two years since the Brexit vote than it could otherwise have been, after adjusting for further stimulus measures from the government and Bank of England and stronger growth in the rest of Europe.
“That’s a reasonable difference,” he said. “In the short term, over the past year-and-a-half, there has been an impact relative to what we would have expected, even with some pretty good tail winds on the back of this economy.”
While Carney was careful to point out that Britain’s chronic low productivity has also held back the economy, he spelled out the two ways Brexit has hurt growth.
It immediately reduced the value of the pound by around 15 per cent against a range of currencies. That raised the cost of imports like food and energy and increased inflation from below one per cent to over three per cent at one point.
For much of the past year, inflation outstripped wages, effectively making households poorer. Now, wages are outstripping inflation again.
The Brexit vote also generated uncertainty and that’s kept a lid on business investment, contributing to a decline in growth even though the unemployment rate is at its lowest rate since the mid1970s.
From being the fastest-growing economy in the Group of Seven industrial nations in the run-up to the Brexit vote, Britain’s economy is now one of the slowest. In the first quarter of 2018, it grew by a quarterly rate of just 0.1 per cent, though the bank thinks that is largely due to a long winter.
Many economic forecasters think revised figures due Friday will show slightly higher growth than that but still the British economy is trailing its peers, such as Germany and France.
Britain’s economic fortunes are not just about Brexit. Carney noted that its weakness since the Brexit vote was also partly due to low productivity.
Getting more output per person will be a key goal for British policymakers, regardless of Brexit. Backers of Brexit would argue that being free of EU rules will give the British government room to set policies that match the needs of British business.
For the near-term though, Brexit uncertainty remains a headwind for the British economy. With Brexit due to take place on March 29, 2019, there is still a lot to work out, notably Britain’s future trading relationship with the EU.