While many people will be fixated with the Bank of England’s decision not to cut interest rates, or with the fact that this is Mark Carney’s last major decision as governor, the most significant aspect can instead be found in an obscure table buried deep in its Monetary Policy Report.
Table 1b might not look at first glance like much of a bombshell, but its contents should send shivers of concern throughout Whitehall.
This is the Bank’s most comprehensive estimate for what has happened to Britain’s economic growth potential since the referendum. And the findings are not pretty.
It is no secret that the Bank has long been concerned about the economic impact of Brexit. It has long believed that introducing barriers to trade could stifle economic growth in future.
But up until now those warnings have been mostly theoretical and mostly based on speculation about what kind of an arrangement the UK would seek.
Table 1b in the Bank of England’s monetary policy committee report
But the Monetary Policy Report, produced barely 24 hours before the UK formally leaves the European Union, sets out some of the consequences in black and white.
Even if the UK successfully and smoothly negotiates “an immediate but orderly move, at the beginning of next year, to a deep free trade agreement” as pledged by Boris Johnson, Britain’s long-term growth potential will be roughly half of what it was before the referendum.
Take a moment to consider that.
This is not about scenarios or indeed worst-case scenarios. This is the Bank’s standard assessment of Britain’s productive potential. And it has found that while the average potential supply growth – in other words the amount of growth it can generate without driving up inflation – is a mere 1.1% between now and 2023.
To put that into perspective, the average supply growth was 2.9% in the decade before the financial crisis. It was over 2% before the referendum.
The chancellor, Sajid Javid, declared recently that he was hoping to hit pre-crisis growth rates – around 2.7-2.8% – in the coming years. But the Bank’s forecasts suggest that will be exceedingly difficult, if not impossible.
Andrew Bailey will become governor of the Bank of England in March
Now, it’s worth mentioning some provisos.
First, the drop in long-term growth potential isn’t entirely down to Brexit.
There is other stuff going on here: Britain is facing a productivity crisis that has nothing to do with being a member of the European Union. Second, the Bank hasn’t incorporated the Tory manifesto or indeed the chancellor’s new fiscal rules, into its forecasts. If the Treasury does splurge then that could push up economic growth.
Rates have been left unchanged by the Bank of England
But here’s the thing. The logic of the Bank’s assessment is that if the chancellor pushes to get up to 2.8% growth and spends accordingly, then that will push up inflation and then the Bank, with its mandate to keep inflation close to 2%, might be forced to raise interest rates and slow the economy.
You see where this is heading. It has been a long time since the Bank of England clashed with the Treasury over the direction of monetary policy, yet that might well be the world we’re living in over the next few years.
And as we’ve seen from the rocky relationship between the US Federal Reserve and Donald Trump – who repeatedly criticises the central bank in public – that could prefigure an uncomfortable era for Andrew Bailey, the man who will become governor in March.