The
recession that Brexit built
A
series of economic indicators point to a serious downturn for the UK
economy.
By
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.
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