Mark Carney at the Treasury Committee Wednesday 4 September 2019
Mark Carney speaking at the Treasury select committee on Wednesday © Parliamentlive TV

A no-deal Brexit could lead to a less severe drop in UK economic output than previously thought because of the preparations taken in recent months, according to a Bank of England analysis.

However, the contraction would still be the second steepest since the second world war, the central bank cautioned.

Mark Carney, Bank of England governor, said that a disorderly departure from the EU would probably result in a decline in gross domestic product before any recovery of 5.5 per cent and a rise in the unemployment rate to 7 per cent, while inflation would peak at 5.25 per cent. 

Last November, the equivalent calculations by the Bank of England were an 8 per cent GDP fall, inflation peaking at 6.5 per cent, and a rise in unemployment to 7.5 per cent. 

By contrast, there was a 6.3 per cent GDP contraction during the 2008-2009 financial crisis, the deepest downturn since the second world war.

Monetary policy could ease in the event of a no-deal Brexit. “On balance it’s more likely that I would vote to ease policy in event of no-deal Brexit than not,” Mr Carney told the House of Commons Treasury select committee on Wednesday.

Most food prices, partly as a result of exchange rate moves, would rise by 5 to 6 per cent, the governor said.

The less gloomy disorderly Brexit calculation was “the result of the preparations for no deal that have been put in place since November”, Mr Carney said.

Examples of the preparations include the announcements that the Port of Calais and Eurotunnel have completed their preparations on French border infrastructure and the introduction of simplified procedures for customs checks at UK borders.

Moreover, UK companies are in the process of obtaining EU certification for their products, and UK traders are registered to be able to continue trade with the EU and vice versa. Agreements have also been reached to roll over existing EU trade deals representing about 7 per cent of the UK’s total trade in goods, according to the BoE.

A further Brexit delay would result in more advanced preparation. “If there were more time to prepare for Brexit, more would be accomplished,” Mr Carney said. “It is absolutely in the interests of UK businesses and the economy to have a time of transition to adjust to Brexit.”

According to the Bank of England analysis, about one in five companies think they are prepared for a no-deal Brexit, but at a cost to productivity.

UK labour productivity has contracted for the fourth consecutive three-month period in the second quarter, according to official statistics.

The updated disorderly Brexit assessment also takes into account the actions by UK and EU authorities to address the risk of disruption to derivatives markets and to reduce the tightening in credit conditions. 

Mr Carney emphasised that this was the worst-case scenario. “Brexit is a trade deal in reverse,” he said. 

The BoE believes that UK banks have sufficient capital to continue lending during the worst of its Brexits options, unchanged from the November publication. 

While preparation for a no-deal Brexit has mitigated the initial estimates of GDP fall in the case of a disorderly Brexit, the weakening global economic environment this year has added to the downside risk for the UK. “The global economy now is less supportive for UK growth,” the governor said. 

His assessment of the health of the economy was bleak. “If you look through underlying trends, our judgment is that the economy is growing very weakly, close to zero,” Mr Carney said.

Economic growth in the UK is highly volatile because of Brexit-related events such as the stockpiling that boosted GDP in the first quarter. In the second quarter, destocking and the decision to bring forward the annual car plant closures from August to April depressed economic growth into a 0.2 per cent contraction.

“The UK economy is softer than I would have expected a few months ago,” Mr Carney said.

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