LONDON — Bank of England Governor Mark Carney on Monday neatly summed up the impact the vote to leave the European Union has had on Britain’s economy.
Speaking at the International Monetary Fund in Washington DC, Carney said: “UK households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU.”
“Households looked through Brexit-related uncertainties initially. But more recently, as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes, they have cut back on spending, slowing the economy.”
Carney’s comments reflect the fact that UK inflation — which pre-referendum had ticked along at less than half of 1% — has jumped due to the pound’s depreciation against both the dollar and the euro after the vote. At the last reading, inflation was 2.9%. Many expect it to pass above 3% before the end of the year.
By contrast, wage growth was just 2.1% when measured as part of the Office for National Statistics’ latest job market figures released in August. That creates a situation where average Brits are now earning less than they were prior to the referendum and seeing an their disposable incomes shrink.
Slowing consumer spending and overall household consumption are widely acknowledged to have driven the UK’s economic slowdown this year, which has seen the UK sink to the bottom in terms of GDP growth among major economies.
Business investment has also slowed. Carney said: “Businesses have been somewhere in between. Since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment (strong external environment, low cost of capital, favourable rates of profitability and limited spare capacity).”
“The balance of these effects has lead overall UK growth to slow in the first half of 2017, even as growth in the rest of the G7 was picking up, and UK growth looks set to remain weaker than the G7 average until mid- 2018,” Carney added.
“The UK has experienced underperformance only twice in the past three decades: once in the depths of the financial crisis and once following the collapse of the Lawson Boom of the late 1980s.”
Carney also reiterated the message delivered by the Bank of England’s Monetary Policy Committee after its September meeting: interest rates are likely to move higher in the near future as a way of holding back rising inflation.
“As the Committee stated last week, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target,” he said.