Carney warns Brexit could lead to recession

Bank of England governor Mark Carney

The Governor of the UK’s central bank said Britain’s economy could fall into a technical recession if the country voted to leave the European Union on June 23 and warned that sterling could fall and unemployment could rise.

“In that scenario we would expect a material slowing in growth, a notable rise in inflation, a challenging trade-off,” said Bank of England Governor Mark Carney at a news conference.

“Of course there’s a range of possible scenarios around those directions, which could possibly include a technical recession,” he said in response to journalists’ questions.

In its latest update, the Bank of England said activity growth in the UK slowed in the first quarter “and a further deceleration is expected” in the second quarter.

“There are increasing signs that uncertainty associated with the EU referendum has begun to weigh on activity,” the BoE warned.

“This is making the relationship between macroeconomic and financial indicators and underlying economic momentum harder to interpret at present.”

The BoE added: “The most significant risks to the monetary policy committee’s forecast concern the (EU) referendum.

“A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy.

“Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise.

“At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources.

“Sterling is also likely to depreciate further, perhaps sharply.

“This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than in the central projections set out in the May Inflation Report.

“In such circumstances, the monetary policy committee (MPC) would face a trade-off between stabilising inflation on the one hand and output and employment on the other.

“The implications for the direction of monetary policy will depend on the relative magnitudes of the demand, supply and exchange rate effects.

“Whatever the outcome of the referendum and its consequences, the MPC will take whatever action is needed to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon.”

UK finance minister George Osborne said in his written reply to Carney it was his view that all the economic evidence available suggests that leaving the EU would do considerable and permanent damage to the UK economy.

“In April HM Treasury published an analysis of the long term impact of leaving the EU,” wrote Osborne.

“The central estimate is that after 15 years outside of the EU, Britain would be worse off by £4,300 per household per year.

“As you point out in your letter, the EU referendum is already having an effect, and that uncertainty is beginning to weigh on economic activity.

“Your letter highlights the fact that sterling has fallen 9% since its November 2015 peak.

“Investment decisions are being postponed, consumers are holding back on purchasing decisions, and commercial real estate transactions fell by around 40% in Q1 2016.

“The MPC’s assessment is that a vote to leave the EU would mean both materially lower growth and notably higher inflation.

“Your letter acknowledges that ‘the MPC would face a trade-off between stabilising inflation on the one hand and stabilising output and employment on the other.’

“So one choice would impose costs on families as higher inflation reduced real household incomes; the other choice would impose costs on families with a hit to the economy and to jobs.

“This is the kind of lose-lose situation that a vote to leave the EU creates. Either way, Britain would be poorer.”