In the run-up to the EU referendum in 2016 the Bank of England and the Treasury were as one in their belief that Brexit would be bad for the economy. Mark Carney, the Bank’s governor and George Osborne, the then chancellor, were seen by the leave camp as two principal architects of ”project fear”.
Now that Britain is finally on the point of departure a gulf has opened up between the two institutions. The current chancellor, Sajid Javid, thinks it is possible for the economy to return to annual growth rates of a little under 3%, similar to those seen in the decade leading up to the financial crisis. The Bank is unconvinced and remains as downbeat about the impact of Brexit as it was three and a half years ago.
Whereas Javid views the UK bounding into the future, Threadneedle Street’s view is a lot more cautious and nuanced.
In the short term, members of the nine-strong monetary policy committee (MPC) see evidence of a pick-up in confidence, investment and activity from the business surveys conducted since the general election. It is paying more attention to the forward-looking indicators than it is the hard data from the past, which is why the committee voted 7-2 – as it did at its last meeting – to keep interest rates unchanged.
But the committee expects the recovery to be muted for two reasons: the long-term damage caused to the economy by the financial crisis and the additional hit provided by Brexit.
Between 1998 and 2007, the economy’s supply-side capacity grew by 2.9% on average: for the next three years the Bank estimates it will average just 1.1%.
Part of the explanation for the big downgrade is that the Bank’s economists now expect Brexit effects to come through quickly rather than being spread over a longer period. By 2023 it thinks the economy’s supply potential – the rate of growth consistent with keeping inflation at its 2% target – will have risen to 1.5%.
That, though, is still a long way from what Javid sees as achievable. Either the Bank or the Treasury is going to end up with egg on its face.
