BoE: Brexit Could Cause ‘Technical Recession’


May 2016

BoE: Brexit Could Cause ‘Technical Recession’

The Bank of England have stepped up their warnings about the potential economic fallout that could follow a vote to leave the European Union, this time going so far as to warn of a recession.

The Bank’s position on our EU membership has been getting steadily more and more unilateral, and increasingly fervent with each press release, speech and minutes publication from the Monetary Policy Committee’s regular meetings.

And now, with nigh-unprecedented candour, the Bank has figured the upcoming referendum as “the most significant risk” to our economic outlook.

The Bank’s Governor, Mark Carney, offered particularly targeted and explicit warnings, arguing that the risks associated with a vote to leave the EU “could possible include a technical recession”.

The issues with the referendum as it relates to our economic outlook and stability are effectively twofold:

First, there is the uncertainty generally – as Carney said in his opening letter for the Bank’s inflation report: “macroeconomics and financial indicators [are] likely to be less informative than usual in light of the referendum”.

Essentially – it is hard to make predictions about how we are to fare in the near future, given the arguably vast difference between the two situations we may end up in, depending on the results of the referendum. It is, furthermore, difficult to form and enact policy when the basic conditions upon which such policies should be based are unknown.

Secondly, as Carney said: “a vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential”. This too “could affect the appropriate setting of monetary policy”.

Carney goes on to say that, based on current data from the foreign exchange market, a vote to leave could cause “sterling’s exchange rate [to] fall further, perhaps sharply”.

This, combined with a potentially negative effect on supply, demand and investment, “could lead to a materially lower path for growth and a notably higher path for inflation” than is currently projected.

Carney has been criticised by members of the Leave campaign for issuing what has been described as “his most political intervention yet.”

Former Chancellor of the Exchequer Norman Lamont warned Carney against making self-fulfilling prophecies by exaggerating claims about the current effects of referendum uncertainty.

He said: “The governor should be careful that he doesn’t cause a crisis. If his unwise words become self-fulfilling, the responsibility will be the governor’s and the governor’s alone. A prudent governor would simply have said that ‘we are prepared for all eventualities’.”

Ultimately, Carney’s message was just that, though there is no denying the politicisation of his warnings.

He did make it clear that a vote to stay in the EU was by no means a vote for immediate economic boost; rather that it was what he considered the safer option.

He acknowledged that ultimately, the problem is the uncertainty, with the potential ‘material economic’ fallout of a vote to leave playing second fiddle to the main issue, which is that the Bank is in a very difficult position when trying to formulate monetary policy based on largely unknown premises.

“There is a risk that we could be over – or under – estimating underlying momentum in the economy in the event of a vote to remain in the EU” he said.

The referendum is but one (albeit major in the eyes of the Bank) cause for economic concern at the moment.

The latest Markit/CIPS report on the services and manufacturing sector painted a far from positive picture, and while the referendum was cited as a factor, it was but one of many, with falling productivity and global economic instability also figuring as causes for concern.