The Governor of the Bank, Mark Carney, has told the Treasury Committee of the House of Commons that by the end of this year, real incomes in the UK will be 5% lower than the Bank had forecast before the shock referendum result to leave the EU in June 2016. Carney put the blame for the worsening household finances down to uncertainty caused by the Brexit vote and its aftermath and the devaluation of the Pound which resulted from the decision to leave the EU.
The Bank claims that household incomes are currently 3.5% below their projected curve had the UK decided to remain within the EU. Despite the Bank’s prediction that wage growth will pick-up over the course, it expects that real incomes will continue to fall over the year to a 5% below pre-referendum forecasts. This is being exacerbated by inflation remaining stubbornly high despite projections that it would have peaked by now; it is currently running at 3%, well below current wage inflation.
Further evidence of the negative effects of the Brexit vote and the consequent uncertainty that it has provoked could be seen in the decline in consumption growth which has slowed from 3% early in 2016 to just 1% now (Brexit stalwarts will argue that it is still growing, of course, and this is just a further chapter of Project Fear). Equally, business investment has slowed as businesses delay major projects until the shape of the post-Brexit economy becomes clearer.
The forecasts that the Bank is making are predicated on the idea that there will be three interest rates in the coming three-year period. The Chief Economist of the Bank, Andy Haldane, was also giving evidence to the committee and said: “Historically the thing that has really killed jobs has been central banks stepping on the brakes too late.” In his opinion, a gradual increase in interest rates would avoid a “handbrake turn” in the future. He and the Governor disagree about the benefits of depreciation of Sterling, with Carney noting that: “Depreciations don’t work. The have an economic effect, but they’re not a good economic strategy. They may be an outcome of various things... but it’s how you make yourself poorer.” Haldane had suggested that a lower Pound had helped to boost exports as the global economy has strengthened. This is true, but a weaker Pound pushes up the price of imported goods and many imported raw materials which are priced in Dollars – clearly there is no “one true religion” in economics!