The withdrawal from the EU will be painful for the UK economy, warned British banker Mark Carney on Monday in a speech at the International Monetary Fund in Washington. Carney hoped that the UK could quickly offset the loss of the EU’s internal market by establishing new trade relations with the rest of the world. It would take time before the new connections are established, he said. The Brexit is a test case of de-globalization: the economy will at least be temporarily less open to goods and workers, which leads to higher prices. This experiment was unique in developed countries.
“It will be, at least for a period of time, an example of deglobalization not globalization,” added Mr Carney. “It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated.”
The sobering diagnosis is unlikely in the presence of Brexit hardliners like Foreign Minister Boris Johnson, who dream of a glorious future outside the EU. Carney did not take a hand in his analysis. The financial markets had responded most quickly to the Brexit vote: the pound had depreciated, the British equities and bonds underperformed in comparison with other countries. In the meantime, the effect is also seen in households and enterprises: consumers have lost their spending, companies have invested less aggressively than would be expected.
As a result, productivity growth is also being met, predicted Carney. The extent would depend on how quickly the country could replace EU trade. The Brexit is an example of a step backward, hoping to make two steps forward.
The Canadian economist replied to the Central Bank’s message, which had already been circulated at the meeting on Thursday that interest rates are likely to rise soon. In view of inflationary pressures, monetary policy action “is likely to be appropriate in the coming months”. The next meeting of the monetary authorities is on 2 November. Until last week, most economists had expected the Bank of England to raise its benchmark interest rate only in 2019.