Bank cuts growth forecast for 2019 as Brexit worries spread from companies to consumers
The Bank of England has warned the economy is on course for its weakest year since the global financial crisis, as evidence suggests Brexit jitters are spreading from companies to consumers.
In its latest quarterly health check, the Bank cut its growth forecast for 2019 from 1.7% to 1.2%, blaming a slowing global economy as well as Brexituncertainty for the sharp downward revision, and said there was a 25% chance of a recession this year.
Threadneedle Street said its gloomier forecast assumed the UK’s departure from the EU in seven weeks goes smoothly. If the prediction comes true, it would be the slowest growth since the economy contracted by 4.2% in 2009, during the financial crisis.
Mark Carney, the Bank’s governor, said: “The fog of Brexit is causing short-term volatility in the economic data and, more fundamentally, it’s creating a series of tensions.”
He said businesses were stepping up contingency plans but the economy as a whole was not prepared for a “no deal, no transition exit”. The mothballing of investment projects was to continue, Carney added.
Rain Newton-Smith, the chief economist at the CBI, the business lobby group, said: “It’s now crunch time – a no-deal scenario must be taken off the table because the economy is seizing up from uncertainty.
“The Bank’s forecasts, when put together with recent business surveys, illustrate the harmful impact on the economy the longer that this goes on.”
The Bank’s nine-member monetary policy committee (MPC) voted unanimously to keep interest rates at 0.75%, and scaled back the number of increases in borrowing costs needed to meet the government’s 2% inflation target to one 0.25 percentage-point rise in the next two years.
Minutes of the MPC’s interest rate meeting said over the past three months, “key parts of the EU withdrawal process had remained unresolved and uncertainty had intensified”.
They added: “Businesses had appeared increasingly to be responding to Brexit-related uncertainties and there were some signs that those uncertainties might also be affecting households’ spending and saving decisions.”
The Bank’s latest forecasts assumed uncertainty and turbulence in the financial markets would persist for longer, but weaker growth now will allow for slightly faster than expected expansion in the future.
The MPC minutes noted consumer confidence, particularly the view households took of the general state of the economy, had softened significantly.
John McDonnell, the shadow chancellor, said: “The Bank of Englanddowngrading its 2019 growth forecast shows that people are increasingly worried about this government’s stewardship of the economy. The government must be stronger in averting a no-deal Brexit and act now to protect the economy.”
Growth is forecast to be 0.2% in each of the first two quarters of 2019, down from the 0.4% in each period pencilled in by the Bank in November. Activity is expected to pick up towards the end of the year, although the Bank stressed the performance of the economy would depend on how Brexit unfolded.
It said: “The economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular the new trading arrangements between the EU and the UK, whether the transition to them is abrupt or smooth, and how households, businesses and financial markets respond.”