sexta-feira, 5 de agosto de 2016
The recession that Brexit built
The recession that Brexit built
A series of economic indicators point to a serious downturn for the UK economy.
Silvia Sciorilli Borrelli
8/4/16, 10:39 PM CET
LONDON — Before Brexit, Chancellor George Osborne predicted that a vote to Leave would lead to a “do-it-yourself recession.”
It seems that’s just what British voters are about to get.
A series of recent economic indicators all point to a steep economic downturn in the U.K., now bracing itself for a recession.
Moving quickly to stave off that scenario, the Bank of England sharply cut interest rates Thursday and offered a bigger economic stimulus package than expected, though analysts already say it won’t go far enough.
The economic downward spiral is yet another challenge for Prime Minister Theresa May’s three-week-old government. While she promised to be more humane than her predecessors and set policy designed to help the “ordinary working people,” these harsh economic realities put pressure on her government to cut spending and prepare for a long and painful era.
The Bank’s growth forecasts for the next three years have plummeted.
The BOE had made no secret of the fact that it was putting together a wide range of contingency plans and preparing for the worse possible outcome. At the time the chancellor and the BOE governor Mark Carney were accused of peddling, in the words of the Leave campaign, “hysterical prophecies of doom.” Now that those predictions are a reality, the Bank of England on Thursday made an “exceptional” decision, said Carney, underscoring that there is only so much that monetary policy can do to backstop the economy. The implication? It’s now May’s government’s turn to step in.
“The Bank of England can act quickly, monetary policy is the first responder to a shock, but the biggest element of the change is a structural one … which we can’t do anything about,” Carney said.
The Bank’s growth forecasts for the next three years have plummeted. It projects that unemployment is set to rise and inflation will likely shoot well over its 2 percent target by 2018. Britain’s GDP growth for 2017 is set to drop to 0.8 percent, half of the figure forecast for the eurozone. That’s a sharp departure from the last quarterly report before the referendum, which projected growth to be 2.3 percent next year, an improvement from this year’s 2 percent.
Manufacturing and services activity are at a seven-year low. JP Morgan CEO Jamie Dimon has warned that 4,000 jobs might have to move overseas, warnings echoed by HSBC and Morgan Stanley. Ryanair is cutting flights from London to focus on European destinations outside the U.K.
Mark Carney, governor of the Bank of England, pauses during the bank's quarterly inflation report news conference in London, on August 4, 2016
Mark Carney, governor of the Bank of England, pauses during the bank’s quarterly inflation report news conference in London, on August 4, 2016 Simon Dawson/Bloomberg via Getty Images
The well-respected National Institute of Economic and Social Research think tank predicted a sharp decline in GDP growth, accompanied by a 50-50 chance of a recession in the country over the next 18 months because of the Brexit vote.
That bleak outlook meshes with numerous other economic forecasts that have reached their lowest levels since 2009, the height of the financial crisis — including an influential purchasing managers index and the British business confidence level.
Andrew Parry, Hermes Investment Management’s head of equities, said the actual outcome may not match the doomsday predictions. “Doubts remain if the gloomy survey data will be fully reflected in the subsequent real-world outcome,” he said.
There is little more the Bank of England can do if they do become reality, however.
Carney has made clear he has no intention of bringing interest rates into negative territory nor resort to so-called “helicopter money,” which is an alternative to quantitative easing and consists, for example, of payments from central banks to individuals.
Such measures have been used by monetary policymakers around the world when interest rates are close to zero and the economy is weak. The Bank’s Monetary Policy Committee will take further action should the Inflation Report’s forecasts come true, Carney said, but with interest rates at 0.25 percent, there’s little room to act.
In a letter Thursday, current British Chancellor Philip Hammond wrote to Carney to say he is prepared to take any necessary steps to support the economy and promote confidence.
“I am clear that the U.K. starts from a position of strength to take advantage of the opportunities that we will have as we forge a new relationship with the EU,” Hammond wrote. “The government will set out its fiscal plans at Autumn Statement in the normal way, once the office for Budget Responsibility had produced a new forecast,” he explained.
Hours after taking office, Hammond sought to publicly clarify there would be no emergency budget to deal with the fallout from the vote to leave the EU, as Osborne had warned about just ahead of the June 23 vote.
“The uncertainty created by the Brexit referendum result cannot be addressed by small changes in interest rates or other monetary measures” — Andrew Sentance, senior economic adviser, PwC
At the time, Osborne had argued that in the case of Brexit, new austerity measures would have to be implemented. Commenting on the BOE’s decision Thursday, Hammond’s predecessor tweeted that the stimulus package “must be matched by permanent supply side reform, lower business taxes, free trade with the EU and an unambiguous message [Britain] is open to overseas investment.”
Hammond also reassured that the government is committed to the “current regime of flexible inflation” and the 2 percent target remains “absolute.”
However the BOE figures show Britain is no longer on course to reach the target, and it is now up to the Treasury to deal with the Brexit consequences.
Some analysts agree.
“The uncertainty created by the Brexit referendum result cannot be addressed by small changes in interest rates or other monetary measures,” said Andrew Sentance, senior economic adviser at PwC. “It requires a political response from the government to make clear the nature of our future relationship with the EU — which will inevitably take time.”
“There are some circumstances when a central bank can do little to offset the shock to the economy and the resulting uncertainty, and that is the case now.”
Fiona Maxwell contributed to this article.