What wonderful powers that Mark Carney, governor of the Bank of England, possesses. At a stroke, he has just succeeded in increasing the size of the economy by three per cent. Well, sort of. Only last November, the Bank of England claimed that a no-deal Brexit could cost the UK economy between 4.75 and 7.75 per cent of growth over a three year period, relative to what would happen under May’s deal. Yesterday, he changed his tune a little, telling the House of Lords economic affairs committee the effect of a no-deal Brexit on the UK economy in three years’ time would be between two and 3.5 per cent smaller than he had previously stated. Why the improvement? It is all, apparently, down to Carney’s clever contingency plans, as well as a few other positive developments.
And if we do have no deal and the economy grows strongly? That, too, will no doubt be down to the Bank’s skilful handling of the situation. This was, of course, what caused the Brexit bounce in the autumn of 2016, when economic growth rebounded in spite of dire predictions, by the Treasury and, to a lesser extent, by Carney, that a vote for Brexit could send Britain into recession. It woz the Bank’s timely cut in interest rates to 0.25 per cent in August of that year wot did it.
Or maybe not. More cynical observers might wonder whether the truth is that neither Mark Carney, nor any other economist for that matter, has much idea of what economic growth will be in future – but by creating a bit more wriggle room the governor is preparing to protect himself against criticism in the event of his forecasts being hopelessly wrong, just as the Treasury’s forecasts proved to be after the Brexit vote (when it claimed that a Leave vote would lead to unemployment rising between 500,000 and 800,000).
To be fair to Mark Carney, he was at pains yesterday to describe his pronouncements as ‘scenarios’ rather than forecasts – though he must know how his words will be interpreted when he starts throwing around figures as to the future size of the economy. Nor do I think there is anyone better qualified than Mark Carney to make forecasts or scenarios for the UK economy. The problem is that economists of all political persuasions, and attitudes over Brexit, have a tendency to over-sell their expertise. They have some very clever-looking economic models to help them, but ultimately those models all rely on the assumptions which are built into them. When it comes to Brexit, those assumptions include the UK retaining exactly the same tariffs on imports from outside the EU as we are currently obliged to levy under the EU external tariff. In other words the bank’s models put no value whatsoever on the economic freedoms we will gain as a result of leaving the customs union.
Would a UK government really make no progress in freeing up trade with the rest of the world in the first three years after a no-deal Brexit? It surely would, to judge by the noises coming out of the government which suggest that some tariffs could be unilaterally slashed within days of Britain leaving the EU. Moreover, there are numerous trade deals in the making, even if they are not ready by 29th March.
In a sense you can’t blame the Bank of England’s crystal ball gazers from leaving future trade deals, and unilateral tariff reductions, out of their estimations – how can they possibly know what economic and trade policies will emerge from the current mess? But wouldn’t it earn Mark Carney respect if he felt able to sit down in front of the House of Lords committee and admit: I have absolutely no idea what will be the size of the UK economy in three years’ time and nor does anyone else?