Bank of England governor Mark Carney has warned about the mounting risk of recession in the event of a no-deal Brexit, as Britain’s growth forecast was slashed to its weakest for 10 years.
The Bank cut this year’s growth forecast to 1.2% – the lowest since 2009, when the economy was in a recession following the financial crisis.
Its shock downgrade compares with 1.7% predicted in November, while the Bank also cut its outlook for 2020 to 1.5%.
Mr Carney cautioned that the “fog” of Brexit was increasing the chances of recession, particularly if the UK crashes out of the EU without a deal.
Even in the event of a smooth transition, the Bank’s latest quarterly inflation forecast signalled a one-in-four chance of recession.
The gloomy growth outlook came as policymakers on the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged at 0.75%.
Mr Carney said: “When the economy is growing more slowly, the probability of it having a negative quarter or two goes up.
“If there’s a shock, which… a no-deal transition Brexit would be – it would be a negative shock, then that further increases the possibility of negative quarters.”
He stressed this was not the Bank’s central forecast for growth.
But he confirmed gross domestic product (GDP) was around 1.5% below where the Bank had forecast it would be back in May 2016, before the shock EU referendum vote.
A sharper-than-expected slowdown in the global economy is also impacting UK growth, according to the Bank.
The Bank’s quarterly inflation report suggested rates may not rise until the second half of 2020, with financial markets only pencilling in one rate rise over the next three years.
The pound initially tumbled after the report, but later recovered to stand 0.4% higher at 1.298 US dollars and 0.4% up at 1.14 euros.
Mr Carney said the probability of a no-deal Brexit had clearly increased, with not much more clarity than the “morning after the referendum”, which is taking it toll on the economy.
“Uncertainty about the outcome of negotiations has intensified since November and is now weighing more heavily on activity, predominantly through lower business investment and tighter financial conditions,” he said.
Consumer confidence “took another step down in January”, he cautioned, as household spending and the housing market have begun to show signs of being impacted.
The Bank said growth was likely to have halved to 0.3% in the fourth quarter of 2018, down from 0.6% in the previous three months and estimated it will fall again to 0.2% in the first quarter and second quarters of 2019.
But it said the hit was expected to be “prove only temporary”, with a recovery in expansion later in 2019 – though this is based on a Brexit deal being reached by March 29.
It forecasts output expanding by a healthier 1.9% in 2021.
In its accompanying quarterly inflation report, the Bank outlined the volatility of its forecasts depending on the outcome of Brexit negotiations.
Mr Carney said a rapid easing of uncertainty could potentially boost growth by around 0.5 percentage points a year over the next three years.
On the flip side, growth could slump to a potential 0.8% in 2019 should uncertainty persist and financial conditions tighten.
In its minutes, the Bank continued to stress that interest rate rises were likely to be needed “at a gradual and to a limited extent”.
It forecasts inflation – currently at 2.1% – will fall below its 2% target for much of 2019, before picking up again due to domestic pressures, such as wage growth.
Economist James Smith at ING said: “The Bank is highly unlikely to tighten policy again through the first half of this year, and indeed the chances of a rate hike at all in 2019 have receded – although we think it’s too early to write one off completely.”