Bank chief’s warning on job losses and house prices

Is the Bank Governor’s dire warning about the economy a fit of pique over voters ignoring his doom-mongering before Brexit vote?

THE Bank of England yesterday issued a fresh warning that job losses and house price falls could follow the Brexit vote.

Governor Mark Carney said there were signs of slowing growth in the British economy, although he insisted the financial system was capable of withstanding any shocks ahead.

The Bank warned that recent share price slumps of banks suggested house prices could fall by almost a fifth, and unemployment could rise by 2.5 percentage points.

Mr Carney responded by giving lenders a £150billion boost to keep the economy moving in a bid to stave off a Brexit downturn.

Staff at the Bank yesterday released a report identifying the key economic risks the UK is currently facing.

It suggested that markets had priced in a rise in the unemployment rate from 5 per cent to 7.5 per cent – meaning around 800,000 more people out of work.

Markets were also prepared for a fall in house and commercial property prices of between 15 per cent and 20 per cent, and a fall in economic growth of around 4 per cent over the next three years.

Mr Carney stressed that he was not offer- ing this as a forecast, pointing out that investors might have over-reacted to the dangers ahead.

Analysts now believe that the Bank of England could cut interest rates from their historic 0.5 per cent low as early as next week to make loans more attractive and prevent stagnation.

Mr Carney once again reassured borrowers that Britain’s banks are strong and the markets will not collapse.

In a speech at the Bank of England’s Threadneedle Street headquarters, he said: ‘The Bank has a clear plan. We are rapidly putting its main elements in place. And it is working.’

Yesterday’s announcement gave British banks permission to cut down on the amount of cash they must hold onto during good times to guard against bad ones – the so-called ‘Countercyclical Capital Buffer’.

It means banks can now access an extra £5.7billion, allowing them to provide up to £150billion more in loans to businesses and families.

The Bank is hoping to avoid a repeat of the so-called credit crunch after the 2008 crash, when the supply of money virtually dried up and the economy ground to a halt.

In his speech, Mr Carney stressed this would not happen again. ‘UK households and businesses who want to seize viable opportunities in a post-referendum world can be confident they will be supported by the financial system,’ he said.

He warned that the Bank would be unable ‘fully and immediately to offset the market and economic volatility’ stemming from the Brexit referendum vote.

And the Governor said the future of the economy and its impact on jobs, wealth and wages was not under the Bank’s control.

But he added: ‘By promoting monetary and financial stability, the Bank of England can help facilitate these decisions, smooth the necessary economic adjustments and help UK households and businesses seize new opportunities.’

Brexit supporters accused the Governor of ‘talking down the British economy’ in order to justify the dire warnings of the consequences of voting to leave the EU before the referendum.

Peter Hargreaves, who was cofounder of investment giant Hargreaves Lansdown – but is no longer a director or employee of the company – said: ‘Mr Carney is being a clever devil. If anything goes wrong he can say he warned us, and if it all sorts itself out he will claim it’s his stimulus. This is a clever act to make us think he’s solved it all, which is of course absolute goulash.’

Savvas Savouri, chief economist at Toscafund Asset Management, added: ‘Mr Carney is trying to undo the harm to his reputation caused by being so vocally against Brexit, and having to watch as his dystopian economic predictions fail to materialise, as much as he tried to invite them on.’

John Longworth, former directorgeneral of the British Chambers of Commerce, said: ‘The Bank has a very important role in stabilising the economy but that’s the role the Bank should have focused on before the referendum. It’s a pity that they joined with so many others in talking down the economy and talking up the idea that there would be a disaster.’

Mr Carney repeatedly refused to be drawn on possible interest rate changes, saying only that the Bank was ‘really thinking through the potential consequences, intended and unintended’ of any decisions.

The Bank’s Monetary Policy Committee will meet on Thursday to discuss interest rates amid increasing signs of concern.

A report by research group Markit estimated that the economy grew by just 0.2 per cent between April and June as the services sector slowed and the construction industry slammed into reverse.

That marks a significant slowdown from growth of 0.7 per cent in the final three months of last year and 0.4 per cent in the first quarter of this year. It is also the slowest rate of growth since late 2012.

Chris Williamson, chief economist at Markit, warned: ‘A further slowing, and possible contraction, looks highly likely in coming months as a result of the uncertainty created by the EU referendum.’

‘Talking down the economy’

Brexit was always going to be a hugely disruptive event. Some, i think with a degree of hyperbole, have compared it to the breakup of the Soviet empire, or the moment the Berlin Wall came down, in terms of its geo-political significance and the threat that it poses to the future of the EU.

But what it is not, as some financial policymakers seem determined to prove, is a ‘Lehman moment’.

in other words, an event similar to the collapse of the American investment bank in the autumn of 2008, which triggered a Western financial crisis and the Great recession.

Yet anyone listening yesterday to Mark Carney, the Governor of the Bank of england, might have thought that the financial system is teetering on the edge of a precipice, and that the Old Lady of threadneedle Street is being forced into erecting a safety net.

in apocalyptic terms, he uttered dire warnings of grave uncertainty in the markets, predicted big businesses would stop spending money on investment and development and that the property market would fall, if not crash.

the Canadian Governor seems determined to show that his desperate warnings — made during the course of the EU referendum campaign — about a loss of economic confidence and a ‘technical recession’ (two consecutive quarters of shrinking GDP) are already proving right.

Fearful

But how much of his Jeremiah-like mutterings are down to pique that the voters dared to defy his warnings, and how much to reality?

take property. the truth is that, if there is a pause in the growth of the residential and commercial property markets, it will have little at all to do with Brexit.

Foreign buyers of London commercial property have been frightened off by the sharp slowdown in the Chinese economy, and the dramatic fall in oil prices in the past year. this has left the rich Gulf states short of the ready cash with which they have previously bought up great swathes of London.

As for Britain’s residential market, it has faced great pressure from ill-advised and, frankly, greedy increases in duties and a tax grab on buy-tolet properties (a favourite use for ordinary people’s savings), proposed taxes on second homes and tough new mortgage rules for would-be homebuyers.

in fact, in spite of all the talk of a property meltdown, one of the major housebuilders, redrow, has reported queues of people at the weekend hoping to join the housing ladder — after the Brexit vote.

elsewhere, the fact is that Mark Carney and the other economic gurus who offered grim projections for growth and incomes during a highly dishonest remain campaign simply can’t know yet what is happening in the real economy of jobs, consumption of goods, industrial output and housing.

Just two weeks have passed since Britain took its decision, and there are virtually no reliable economic indicators to go on as yet.

in listening to the Bank’s Governor, i am reminded of the famous dictum of the Nobel Prize-winning economist Paul Samuelson. referring to financial forecasts made by so-called experts, he sardonically noted that they had predicted ‘nine out of the last five recessions’.

Conversely — and all too tellingly — when a genuine crisis does unfold, too often we are not warned at all. remember that the international Monetary Fund, the Paris-based Organisation for economic Co-operation and Development and the Bank of england all singularly failed to predict the great banking and financial crisis of 2007-09.

Yet, looking back, all the signs were there for the so-called experts to spot.

the great danger with the position Mark Carney has taken before and after the referendum is that the more our public officials warn of the dangers of the post-Brexit world, the more a damaging downturn is likely.

economics is largely about human behaviour. How the economy performs is the result of millions of ordinary people taking decisions about their lives and thousands of businesses, large and small, forming a view about investment prospects.

if, as was the case in the referendum campaign, there are dire warnings of impending recession, it is hardly surprising that some investors are cautiously now seeking to protect their assets.

Perhaps unsurprisingly then, in the past two days, it’s been reported that major commercial property funds at the insurers Standard Life and Aviva have been suspended to stop withdrawals of investors’ money.

But do we really need to be so fearful?

Dismal

Having skulked in the shadows for days after the Brexit vote, Chancellor George Osborne has come out fighting in a bid to infuse the economy with new zip.

though he’s given up on his fiscal target of a budget surplus by 2020 — which he was never going to achieve, even without Brexit — he does appear to have remembered that cutting taxes can have an energising effect.

Big American and continental corporations will see Britain as an attractive place to do business if, as the Chancellor is promising, corporation taxes are brought down to 15 per cent, against the prevailing rates of 30 per cent in Germany and France and 34-38 per cent in the U.S. What Mark Carney and other policymakers need to shout from the rooftops is that the free markets are working as they are meant to.

the 10 per cent devaluation of the pound in the past two weeks may be uncomfortable for ordinary people using foreign currency on their summer breaks, but it is a boon for Britain’s businesses.

it makes our exports cheaper, thus giving us a competitive edge. rolls-royce, for example, has already indicated its income could end up being £400 million higher, generating up to £40million of extra profits.

this expected boost in exports is among the reasons the FTSE 100 share index has shrugged off all the dismal talk and soared to new heights.

this paper has expressed grave reservations about the proposed £21billion merger of the London Stock exchange with its German rival Deutsche Boerse, believing that the flagship British exchange functions perfectly well on its own.

For all that, it is interesting to note that LSE shareholders have just voted overwhelmingly in favour of the deal, demonstrating that, in the financial sector where Britain is so dominant, commercial life is proceeding as normal, and that the hard money in Germany has faith (along with that nation’s version of the CBI) in Britain.

Revenge

ironically enough, the stumbling block to the deal is going to come from German financial regulators seeking to take some form of revenge on Britain for daring to break away from the ossified EU and the failing eurozone.

the City of London employs 790,000 people, encompassing every kind of skill from currency trading to complex derivatives markets and advice on mergers and acquisitions. it is the legal capital of the world, with dozens of American and european firms making their homes here.

even if, after Brexit, a few thousand banking jobs were to relocate to Paris, Frankfurt or Amsterdam, it is impossible for them to replicate the depth and breadth of expertise found here.

this is the real narrative we should be hearing from Mark Carney and the Bank of england. He should know better than to scare the public about an already vulnerable property market, weakened by factors that have nothing to do with the Leave vote.

As the custodian of financial stability, Carney may believe he is doing his job and acting within his mandate. But there will be Brexit politicians — some of whom will soon be dominant in Westminster — who will regard his public interventions as a betrayal of Britain Plc.

the last thing the country needs at present is the forced resignation of the Bank’s Governor, for that would only add to the climate of financial uncertainty he keeps talking about.

But even the most high-profile central bankers may not be immune from the wrath of our newly elected political leaders.