Bank of England warns of likely global economic hit to UK
T he growth outlook for the British economy has deteriorated largely as a result of a gloomier global backdrop, the Bank of England said Thursday as it refrained from cutting rates in the run-up to a general election that could have huge repercussions on Brexit.
Though waning fears of a no-deal Brexit should help cushion growth in the near term, the bank said the British economy will grow by around one per cent less over the coming three years than it forecast just three months ago.
That’s primarily due to a weaker global economy in the wake of the ongoing United States-China trade spat.
For two of the bank’s nine rate setters on the Monetary Policy Committee, the deteriorating outlook was enough for them to back an immediate rate cut. The majority, though, opted to keep the bank’s main interest rate on hold at 0.75 per cent. That’s the first time there’s been a split on the committee since June 2018.
Bank of England Governor Mark Carney, who is due to step down at the end of January, conceded that a rate cut soon was possible.
“If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation,” he said.
Most of the downgrade to upcoming growth projections was due to a weaker global economy and markets. However, the withdrawal agreement that British Prime Minister Boris Johnson secured with the European Union last month is also weighing on longer-term growth projections as it envisions a looser economic relationship with the bloc than previously pencilled in by the bank, including border checks and other regulatory hurdles.
In the near term though, the fact there has been a deal that could soon command support in Parliament has reduced fears of a no-deal Brexit and that should shore up growth, according to Carney. Most economists think a no-deal Brexit would lead to a deep recession as tariffs and other impediments are slapped on trade with the EU, Britain’s main export destination.
There are huge uncertainties to the forecasts, though, not least because the December 12 general election has the potential to radically alter Brexit.
Johnson hopes his Conservative Party can muster a majority to push through his withdrawal agreement to facilitate an orderly British exit from the European Union at the end of January, Britain’s new scheduled departure date.
The main opposition Labour Party wants to renegotiate Johnson’s deal to ensure closer ties and then put it to the people in another referendum, with an option to remain in the EU. And most other prospective lawmakers in the House of Commons are predicted to be anti-Brexit.
Brexit uncertainty has contributed to a slowdown in growth, largely by weighing on business investment. The slowdown prompted two Bank of England rate setters to seek a quarter-point cut, news of which saw the pound fall from US$1.2855 to US$1.2815.
Michael Saunders and Jonathan Haskel argued that the economy had “a modest but rising amount of spare capacity” and that underlying inflation was “subdued” below the bank’s target rate of two per cent. They also said there were risks that economic growth could disappoint due to the impact of a weaker global outlook and persistent Brexit uncertainties.
By the time the Monetary Policy Committee meets again to decide on interest rates on December 18, everything may be up in the air again.
“We wouldn’t rule out another hung Parliament, which could either prolong Brexit uncertainty or alternatively see a Labour-led minority government begin organising a second Brexit referendum,” said James Smith, an economist at ING. “In other words, it’s not inconceivable that we see another sizeable change to the bank’s projections early next year, depending on who prevails at next month’s election,” he said.
There may also be more clarity about Carney’s successor. The governor, though, did not rule out extending his time at the helm for a third time if asked by the government. He said it’s important that there’s a “smooth and orderly transition” to Britain’s future relationship with the EU as well as for his successor.