Video report by ITV News Economics Editor Joel Hills
The Bank of England has, unexpectedly and for the first time, put together an economic forecast based on a proposed Brexit deal.
Ever since the referendum, the Bank has scrupulously avoided making any assumptions about what Brexit would look like, preferring instead to model “a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union”.
All very uncontroversial.
But the Bank’s assumption has changed.
As an election campaign kicks off, the Bank has decided to start assuming that the UK will leave the EU and that will be “an orderly transition to a deep free trade agreement” of the sort Boris Johnson is promising to deliver if he is the next prime minister.
The Bank has read the revised Withdrawal Agreement and the vision for the future trading relationship set out in the new Political Declaration that was published last month.
The Bank decides that they signal that while there won’t be any tariffs on future UK-EU trade, there will also be significant trade barriers in the form of customs checks and emerging divergence on regulation and standards.
What’s the net effect of the deal of the UK’s economic prosperity?
Hardly a disaster although hardly consistent with Boris Johnson’s boast that he’s negotiated a “great” Brexit deal.
There’s no economic Brexit bounce here at all.
The Bank believes UK economic growth is “materially weaker ” this year than in either 2017 or 2018 and forecasts that GDP growth will be 1% lower over the next three years than it was predicting in August.
Why is this?
Prime minister Boris Johnson on why the Bank of England governor was right
The Bank says growth is subdued, due in part, to weaker global growth but also ongoing Brexit uncertainty which continues to put businesses off investing and now also appears to be damaging consumer confidence.
The Bank believes global growth will rebound and with it UK growth.
The impact of the Brexit deal starts to be felt towards the end of 2020, when the Withdrawal Agreement states we will leave the EU.
The Bank calculates that Sajid Javid’s spending increases (if stuck to) will boost economic activity, so too will the disappearance of all the uncertainty surrounding our future trading relationship with the EU.
But the “deep free trade agreement” will also damage the flow of trade, holding UK growth back and going forward growth will still be “restrained” by historical comparisons.
The Bank says it made the decision to adopt Boris Johnson’s Brexit deal into its economic forecasts when the Withdrawal Agreement Bill passed its second reading in parliament on October 22.
Governor of the Bank of England Mark Carney explains what the decisions have been based on
Fair enough, but what will seem extraordinary to some is that the Bank decided to stick to that plan when the election - the outcome of which is highly uncertain - was called a week or so later.
The Bank is opening itself up to the criticism that it is speculating on the outcome election.
It appears to be assuming a Conservative victory, that the new government secures something similar to the “best in class” trade deal which Boris Johnson promises and that we part company with the EU by end of 2020.
These are bold, some would argue heroic assumptions and the smart money says this will cause a bit of a stink.
The Bank says if everything come to pass as forecast, which of course it never does, there will be a case for raising interest rates at a “gradual pace and a limited extent.”
For now, Banks Rate remains on hold.