Bank of England Governor Mark Carney on Wednesday sought to quantify the short-term hit of Brexit to British households, but expressed hope that living standards would finally start to improve this year following a period of rising inflation.
Addressing a lawmakers’ committee, Carney predicted that average wages would rise by more than inflation this year, giving a boost to economic activity at a time when the economy is facing uncertainty linked to the nation’s looming exit from the EU.
“The effect of the uncertainty around future trading relationships is having an impact on the demand side of the economy,” Carney said. “I don’t think that’s controversial, it’s pretty clear ... We have moved from the top of the pack to the bottom.”
The Brexit vote of June 2016 is the key event, Carney said, to explain why Britain has fallen down the global growth table.
Carney said businesses invested about 3 percent less than they otherwise would have last year.
From being one of the fastest-growing economies in the G7 leading industrial nations, Britain is now one of the slowest. Last year, the British economy expanded by 1.8 percent — still better than many forecasters predicted before the referendum largely because the ensuing 15 percent or so fall in the British pound gave a boost to exporters, particularly to those trading with countries in the EU where trade remains free.
Britain is due to leave the EU in March next year, but there is uncertainty over how it will do so. Carney has laid out his hope that a transition deal would be agreed on soon whereby Britain remains in the tariff-free European single market and customs union. Business lobby groups are urging clarity so that they can plan ahead.
The vote on Brexit triggered inflation as the British pound’s fall raised the cost of imported goods, notably energy and food. From below 1 percent, annual inflation is running at 3 percent, an increase that prompted the Bank of England to raise interest rates in November last year for the first time in a decade.
Carney sought to provide clarity on the scale of the cost to household incomes since the referendum.
Real wages have been 3.5 percent lower than the bank had been predicting before the referendum, as a result of the higher inflation and weaker increase in wages, he said.
However, there are signs that wages are beginning to rise. Official figures released on Wednesday showed average weekly earnings in the three months to December last year — excluding bonuses — were up 2.5 percent on the previous year, ahead of the previous month’s 2.3 percent.
Carney and other rate-setters also kept the door ajar to another rate hike this year, but stressed that much depends on developments beyond their control, including the Brexit discussions, which have entered a crucial stage focusing on future trading relations.
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