Bank of England foresees 'less severe' impact of no-deal Brexit

   The update comes after Prime Minister Boris Johnson on Wednesday proposed holding a general election on Oct 15, should lawmakers force him to seek a three-month Brexit extension from Brussels rather than carrying out a no-deal exit on Oct 31.
The update comes after Prime Minister Boris Johnson on Wednesday proposed holding a general election on Oct 15, should lawmakers force him to seek a three-month Brexit extension from Brussels rather than carrying out a no-deal exit on Oct 31.PHOTO: REUTERS

LONDON (AFP) - The Bank of England believes the impact of a no-deal Brexit on the UK economy is "less severe" than previously thought owing to better preparedness, governor Mark Carney said Wednesday (Sept 4).

In a letter to the chair of a cross-panel committee of British MPs, Carney said "improvements in preparedness mean that the appropriate set of assumptions to underpin a worst case scenario would now be less severe than those used in the disorderly scenario published in November".

Rather than a a gross domestic product shortfall of 8.0 per cent, a no-deal Brexit would now result in "an initial peak-to-trough decline in GDP of 5.5 per cent", Carney said.

Unemployment would meanwhile surge to 7.0 percent rather than 7.5 per cent, up from a current 45-year low of 3.8 per cent.

Inflation would still soar to 5.25 per cent, but less than a previous estimate of 6.5 per cent.

Carney's update comes after Prime Minister Boris Johnson on Wednesday proposed holding a general election on Oct 15 should lawmakers force him to seek a three-month Brexit extension from Brussels rather than carrying out a no-deal exit on Oct 31.

Carney's letter sent to John Mann, an MP for the main opposition Labour Party, was dated Tuesday, one day ahead of the BoE chief's appearance before the cross-party Treasury Committee.

"There's more preparation that can be done, both in terms of public preparation and preparation by businesses," Carney told the panel of lawmakers.

 
 
 
 

"It stands to reason that if there were more time, more would be accomplished." He meanwhile confirmed that the weak state of the UK economy, which stands close to recession.

"If you look through the underlying trend, our judgement is that the economy is growing very weakly, positive but very close to zero."

A key survey Wednesday showed that British business activity shrank in August, slammed by weakness in the key construction, manufacturing and services sectors, as the economy suffers from Brexit turmoil.

The purchasing managers' index (PMI) for all UK sectors dropped to 49.7 from 50.3 in July, according to IHS Markit, which compiles the data.

A figure below 50 indicates contraction.

"The PMI surveys are so far indicating a 0.1-percent contraction of GDP in the third quarter," which would mean Britain had fallen into recession, noted Chris Williamson, chief business economist at IHS Markit.

Britain's economy unexpectedly shrank in the second quarter of the year.

The official definition of recession is two quarters of economic contraction in a row.

"Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months," Williamson added.