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| Shadow of Brexit still looms over economy. Experts debate the data | Shadow of Brexit still looms over economy. Experts debate the data |
| (about 3 hours later) | |
| Two former members of Bank of England’s rate-setting committee on Britain’s economic prospects | Two former members of Bank of England’s rate-setting committee on Britain’s economic prospects |
| Andrew Sentance | Andrew Sentance |
| Senior adviser to Cambridge Econometrics and member of the Bank of England’s monetary policy committee 2006-11 | |
| A new government and a new Bank of England governor. This should be a fresh start for the UK economy. But the dark shadow of Brexit continues to overhang our economic performance and prospects.In its latest assessment, the Bank expects growth of 0.1% in the final quarter of this year. That would mean that the UK economy has not grown at all since the first quarter of the year. 2019 is likely to turn out to be the weakest year of economic growth since the financial crisis.This is not just because of Brexit. The world economy has slowed and our major trading partners in Europe – especially Germany – have been affected by this global slowdown. But the uncertainty created by Brexit has not gone away, even if the broader political instability has been lessened with the election of a majority Conservative government.The Brexit withdrawal agreement will now pass through parliament but the new ingredient adding to Brexit uncertainty is what happens at the end of 2020 when the transition period comes to an end. It is unlikely that a full trade agreement with the EU can be put in place by then, so the UK economy could face another cliff edge with the risk of a no-deal scenario.We are likely to see an expansionary budget early next year, with spending increases and tax cuts. That will help offset some of the current negative influences on the UK economy – but not totally. Economic growth of 1-1.5% in 2020 is the best we can hope for.Andrew Bailey, the new Bank governor, is likely to preside over a decade of very subdued economic growth in the 2020s. This mainly reflects underlying structural factors – including Brexit – but also slow underlying productivity growth and the fact that there is little slack left in the labour market. In these circumstances, the correct monetary policy response should be to gradually raise interest rates. It will be interesting to see if the new chairman of the MPC, who has not served on the committee before, tries to steer a different course from the drift and indecision of the Mark Carney regime. | A new government and a new Bank of England governor. This should be a fresh start for the UK economy. But the dark shadow of Brexit continues to overhang our economic performance and prospects.In its latest assessment, the Bank expects growth of 0.1% in the final quarter of this year. That would mean that the UK economy has not grown at all since the first quarter of the year. 2019 is likely to turn out to be the weakest year of economic growth since the financial crisis.This is not just because of Brexit. The world economy has slowed and our major trading partners in Europe – especially Germany – have been affected by this global slowdown. But the uncertainty created by Brexit has not gone away, even if the broader political instability has been lessened with the election of a majority Conservative government.The Brexit withdrawal agreement will now pass through parliament but the new ingredient adding to Brexit uncertainty is what happens at the end of 2020 when the transition period comes to an end. It is unlikely that a full trade agreement with the EU can be put in place by then, so the UK economy could face another cliff edge with the risk of a no-deal scenario.We are likely to see an expansionary budget early next year, with spending increases and tax cuts. That will help offset some of the current negative influences on the UK economy – but not totally. Economic growth of 1-1.5% in 2020 is the best we can hope for.Andrew Bailey, the new Bank governor, is likely to preside over a decade of very subdued economic growth in the 2020s. This mainly reflects underlying structural factors – including Brexit – but also slow underlying productivity growth and the fact that there is little slack left in the labour market. In these circumstances, the correct monetary policy response should be to gradually raise interest rates. It will be interesting to see if the new chairman of the MPC, who has not served on the committee before, tries to steer a different course from the drift and indecision of the Mark Carney regime. |
| David Blanchflower | David Blanchflower |
| Professor of economics at Dartmouth College in the US and member of the Bank’s MPC 2006-09 | |
| So Brexit it is – but when it will actually take place and in what form is anyone’s guess. There are many years of negotiation still ahead, with much continuing uncertainty. Foreign firms and even some British firms will find it more attractive for many years to take whatever investment money they have to Germany, the Netherlands, Denmark or Sweden – which all look like safer havens than the UK. Firms continue to stockpile as insurance against possible disruption from a disorderly Brexit. None of this is good for UK growth. | So Brexit it is – but when it will actually take place and in what form is anyone’s guess. There are many years of negotiation still ahead, with much continuing uncertainty. Foreign firms and even some British firms will find it more attractive for many years to take whatever investment money they have to Germany, the Netherlands, Denmark or Sweden – which all look like safer havens than the UK. Firms continue to stockpile as insurance against possible disruption from a disorderly Brexit. None of this is good for UK growth. |
| We still have no idea what trade deals will be struck, what will happen in Ireland and whether it will ever be feasible to revert to World Trade Organization rules, given the US has shut down the WTO appeals court by blocking the appointment of new judges. | We still have no idea what trade deals will be struck, what will happen in Ireland and whether it will ever be feasible to revert to World Trade Organization rules, given the US has shut down the WTO appeals court by blocking the appointment of new judges. |
| As a member of the EU, disputes between firms can be settled by firms themselves going to the European courts. Under the WTO, the system is unwieldy as firms must get countries to sue one another. The absence of any dispute resolution system now will make negotiating trade deals even more complex and time-consuming. This is bad news for anyone foolish enough to advocate a no-deal Brexit. | As a member of the EU, disputes between firms can be settled by firms themselves going to the European courts. Under the WTO, the system is unwieldy as firms must get countries to sue one another. The absence of any dispute resolution system now will make negotiating trade deals even more complex and time-consuming. This is bad news for anyone foolish enough to advocate a no-deal Brexit. |
| The pound and stock markets have rallied on news of a Tory victory, especially among banks, housebuilders and utility companies. It was also boosted by news of a possible deal in the China-US trade talks. | The pound and stock markets have rallied on news of a Tory victory, especially among banks, housebuilders and utility companies. It was also boosted by news of a possible deal in the China-US trade talks. |
| Good news in the markets is not necessarily good for ordinary people, though, as the UK economy continues to slow. Nobody expects growth in the UK in 2019 to be much above 1%. Business confidence surveys are still weak, with IHS Markit and the Chartered Institute of Procurement and Supply showing the service sector failed to grow for the third month in a row. Manufacturing and construction are in recession territory, while high street sales are weak and house prices have fallen again. | Good news in the markets is not necessarily good for ordinary people, though, as the UK economy continues to slow. Nobody expects growth in the UK in 2019 to be much above 1%. Business confidence surveys are still weak, with IHS Markit and the Chartered Institute of Procurement and Supply showing the service sector failed to grow for the third month in a row. Manufacturing and construction are in recession territory, while high street sales are weak and house prices have fallen again. |
| Wage growth slowed sharply on the month, from 3.8% in September to 2.4% in October, and in real terms average pay is still 2.4% below the level before the financial crisis. I was particularly struck by the worst possible news at Christmas, that the price of chocolate went up, although inflation at 1.5% remains well below the MPC’s target of 2%. Softness in the economy led two MPC members to vote for rate cuts this month because of their concern over downside risks from a weaker world economic outlook and Brexit uncertainties. | Wage growth slowed sharply on the month, from 3.8% in September to 2.4% in October, and in real terms average pay is still 2.4% below the level before the financial crisis. I was particularly struck by the worst possible news at Christmas, that the price of chocolate went up, although inflation at 1.5% remains well below the MPC’s target of 2%. Softness in the economy led two MPC members to vote for rate cuts this month because of their concern over downside risks from a weaker world economic outlook and Brexit uncertainties. |
| I am concerned about what is going to happen in traditional Labour seats such as Wakefield, Bolsover and Darlington that voted Tory, expecting them to give a boost to their living standards once Brexit is “done”. It looks to me that living standards for them will only go down after their hopes were raised. Disappointment is going to be in the air as the government will not be able to get their dream-world Brexit done. | I am concerned about what is going to happen in traditional Labour seats such as Wakefield, Bolsover and Darlington that voted Tory, expecting them to give a boost to their living standards once Brexit is “done”. It looks to me that living standards for them will only go down after their hopes were raised. Disappointment is going to be in the air as the government will not be able to get their dream-world Brexit done. |
| Boris Johnson should bring on the big infrastructure spending boost he promised. But it will take time to happen. And by then it will be too little too late. | Boris Johnson should bring on the big infrastructure spending boost he promised. But it will take time to happen. And by then it will be too little too late. |