The Bank reduces growth forecasts, as the Governor warns on Brexit

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest Bank of England forecast and recent developments within the EU.

The main points are:

  • In line with other forecasters, the Bank downgraded its growth forecasts for the UK, albeit modestly, in the May Inflation Report.
  • The Bank Governor warned that a Brexit vote could lead to a fall in the pound, perhaps sharply, lower growth and higher inflation.
  • Latest UK data were mixed. The labour report was consistent with a slowing economy, the March production data were poor and the March trade deficit increased. But April’s retail sales were buoyant and the housing market looks firm.
  • Eurostat downgraded GDP growth in the Eurozone to 0.5% (QOQ) for 2016Q1. There was robust growth in Spain and Germany. But the Greek economy contracted and growth in Italy and Portugal was weak.
  • The Commission’s “country-specific recommendations” noted that Member States had made progress with reforms but more needed to be done. Portugal and Spain, both in the “excessive deficit procedure”, were given another year to get their budget deficits within the 3% of GDP limit. Italy was deemed to comply with the Stability and Growth Pact, despite a very high debt to GDP ratio.
  • The Commission noted Germany’s “large and persistent” current account surplus, a major “macroeconomic imbalance”, without taking concrete action.
  • Cyprus exited its financial assistance programme in March.
  • A deal on the next tranche of the €86bn bailout for Greece could be agreed this Tuesday (24 May).

Ruth Lea said, “Even though there are some signs of further UK economic slowdown, it is impossible to say how much of the deceleration is due to uncertainty ahead of the referendum vote on 23 June. There is concern that a Brexit vote may lead to a significant run on the pound, but the Bank is well placed to support the currency.”

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