The governor of the Bank of England has made a staunch defence of the institution’s economic forecasts, saying the UK economy is still facing “headwinds” following the Brexit vote.
Mark Carney accepted business investment had held up better than the Bank predicted following the EU referendum, but said areas of the UK economy were still not firing at rates that were consistent with world economic growth of 4%.
While the UK economy has slowed since the Brexit vote, economic growth has defied expectations of a substantial slowdown and churned out a better-than-expected performance in the fourth quarter of 2017 at 0.5%.
Speaking to the House of Lords Economic Affairs Committee, Mr Carney sought to bat away criticisms that the Bank had been too pessimistic on the economy.
He said: “I think in a mature discussion of the effects of the referendum and the prospects for this economy during a period of transition, which is what this economy is under, we should recognise how the forces of adjustment are affecting the economy.
“Yes, it is good news that business investment was rounded to 2% with the most recent figures.
“But business investment is not up any way to the degree with a world economy growing at 4%, with the most supportive financial conditions in over a decade, with the strongest balance sheets in probably 25 years and huge opportunities of greater certainty.
“It is not growing to the extent at which it should. We estimate that it is four percentage points below what it otherwise would be.
“That is not based on us just estimating, but is based on discussions with 2,000 businesses up and down the country.”
He added: “I think we all recognise that this year particularly that there is a period where there are some headwinds to this economy that we all want to see cleared.”
While Mr Carney said a “disorderly Brexit” was unlikely, he stressed that Britain’s banks had sufficient capital reserves to cope with such an outcome.
He added: “If there were to be a disorderly Brexit – not a likely scenario at all, less likely than at the time we did the assessment in the fall – but if there were, what would be the channels that would affect the financial system, and what can be done to mitigate them.
“We reported on that in our financial stability report. We think, for example, that the banking system is adequately capitalised, well capitalised … for a disorderly Brexit.”
The committee hearing comes as the Government grapples with leaked Brexit analysis that concludes Britain would be worse off whatever deal is struck with Brussels.
The document, seen by the BuzzFeed News website, concluded economic growth would be lower under a range of potential scenarios.
Even if the UK was able to negotiate a comprehensive free trade agreement, it estimates growth would be down 5% over the next 15 years.
Mr Carney said he was “not familiar” with the leaked documents regarding Brexit’s impact on the economy.
He added: “Obviously we have discussions with Treasury….but we’re not preparing longer term forecasts.”
“We don’t have a fully articulated forecasts of different trading relationships.”