Column / Brexit Briefing
Bank’s reality check highlights Brexit vacuum
By Benjamin Fox
This year it’s different - or at least it should be. The Bank of England confirmed that the UK economy is in rocky post-EU referendum waters on Thursday (4 August), when it slashed interest rates and its economic forecasts for the next two years.
By cutting interest rates to 0.25, the first cut since the height of the banking crisis in 2009, and a record low, Governor Mark Carney has given the UK a post-referendum reality check. The Bank also cut its forecast for the UK’s economic growth in 2016 and from 2.3 percent to 0.8 percent in 2017.
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To Carney, deciding to leave the EU is equivalent to ‘a regime change’, and will result in 'little growth in GDP in the second half of the year'. Stagnation, if not quite recession.
The Bank also announced a stimulus package including a £100bn (€118bn) scheme to force banks to pass on the low interest rate to mortgage holders and to businesses. It will also buy £60bn (€71bn) of UK government bonds and £10bn (€11,8bn) of corporate bonds. So QE is not just for Mario Draghi in Frankfurt.
The Bank’s forecasts are, admittedly, less forbidding than the Treasury’s pre-referendum ’shock scenario’ of a 3.6 percent economic hit but the UK economy will still suffer a 2.5 percent hit between now and the end of 2018. And it could get worse.
That it is the central bank rather than government taking action highlights the policy vacuum and lack of planning for a Brexit vote.
Theresa May’s new finance minister, Philip Hammond, has only been in post for three weeks and ruled out an emergency post-referendum budget. But he will be under intense pressure to set out his own stimulus plan in the autumn.
Reacting to the UK’s new economic reality is not the only policy vacuum that exists in Whitehall.
David Davis’s new department for exiting the EU (DexEU) exists only on paper - it has no buildings and, is entirely reliant on borrowing staff from other departments. Leading City law firms and consultancy giants McKinsey and Accenture have been approached about seconding staff to the new department.
Getting the staff shouldn’t be too difficult. There is a big pool of talented Brits with experience of negotiating in the EU. For Davis, however, they are almost all the ‘wrong sort of people’ - i.e. europhile civil servants and political advisers who regard the Brexit vote as an unparalleled act of national self-immolation, and who want to keep the UK firmly inside the single market if ministers and voters can’t be persuaded to change their minds about leaving the EU.
A europhile in DexEU would be a pilgrim in an unholy land, or a quisling, depending on your point of you.
Davis is understood to favour delaying the trigger on Article 50 until next February. The delay, which continues to frustrate many European capitals, is as much a necessity as a tactic. The UK simply doesn’t have the civil servants in place to do any negotiating.
Lawyers and lobbyists will be first in line to make money out of the Brexit negotiations. It was ever thus.
Senior Conservatives close to the government are breezy in their insistence that a mutually beneficial deal will be struck. The Leave camp had given very little thought to what their exit strategy and a new UK/EU relationship would look like, and will spend their summer holidays frantically jotting down ideas.
It means that the next four months will define the strategy the UK government takes to the negotiating table.
The party conference season in late September, which has gradually become a corporate money-making fair, devoid of a policy-making role, has suddenly become crucially important. The Conservatives’ shin-dig in Birmingham will be the only game in town.
At the moment, Theresa May’s Brexiteers seem to believe that the UK can have its cake and eat it.
Publicly and privately, May is telling her ministers that controlling EU migration is at least as important as single market access.
My guess is that, as with the UK’s economic prospects outside the EU, a rude awakening awaits.
Benjamin Fox, a former reporter for EUobserver, is a consultant with Sovereign Strategy and a freelance writer