Brexit uncertainties ‘more entrenched’
BREXIT UNCERTAINTIES are becoming “more entrenched” and increasingly weighing on the British economy less than three months before the country is scheduled to leave the European Union (EU), the Bank of England said Thursday.
The bank’s nine monetary policymakers unanimously decided to keep the bank’s main interest rate on hold at 0.75 per cent, and said heightened fears about the possibility of a disorderly and disruptive no-deal Brexit were hobbling growth and likely to keep business investment in check over the coming months.
In quarterly projections published alongside the interest rate decision that are conditioned on a smooth Brexit scenario, the bank said economic growth in the second quarter is set to be flat, down from 0.5 per cent in the first three months. That, it said, is partly related to the unwinding of Brexit contingency measures that firms took in the run-up to the original
March 29 Brexit deadline, as well as a higher probability of a nodeal Brexit and worries over a trade war between the United States and China.
The bank is now forecasting growth this year and next of 1.3 per cent, down from 1.5 per cent and 1.6 per cent, respectively. Its forecasts also indicated that the country could also be slipping into recession early next year in light of all the Brexit uncertainties — its forecasts suggested there’s a onein-three chance of that happening.
“Global trade tensions have intensified, global activity has remained soft, and the perceived likelihood of a no-deal Brexit has increased significantly,” Bank Governor Mark Carney said.
Carney said concerns over a nodeal outcome have led to a “marked depreciation” of the pound, and that the currency would fall further in the event the country leaves the EU without a deal.
The pound has already fallen sharply in recent days to a 28-month low below US$1.21, as new Prime Minister Boris Johnson escalated talk of a no-deal Brexit and put his government on notice that Britain will leave the EU on Halloween, the current Brexit date, come what may.
Possible recession
Most economists think that a no-deal Brexit would plunge the British economy into recession as firms struggle to cope with the subsequent imposition of tariffs on traded goods. The bank has previously warned that a worstcase rupture could see the British economy shrink by eight per cent in a matter of months after Brexit, though it has since indicated that better preparedness for such an outcome means that the likely recession would not be as severe.
Since Britain voted to leave the EU in June 2016, the bank has assumed that its departure would be orderly, that Britain would negotiate a settlement with the EU which would lead to a smooth pathway to a new future trading relationship. Though Johnson’s predecessor, Theresa May, negotiated a deal with the EU, it was rejected by the British Parliament on three occasions.
Johnson has said he wants a renegotiation but won’t join in if the EU rejects opening up the so-called withdrawal agreement. The EU says that’s not open for discussion, hence the rising talk of a no-deal Brexit and the pound’s woes. Though Johnson has embarked on this no-deal path, it’s not clear whether he would be able to push it through, given what appears to be a majority in Parliament against it. As a result, there’s also growing talk that Johnson may seek to call a general election in the run-up to Brexit, and that he will stand on a no-deal platform.