Yesterday the Governor of the Bank of England attended the UK Cabinet meeting to update them on what the Bank thinks about the potential post Brexit economic situation. Typically the main area focused on has been house prices which of course is revealing in itself. Let us take a look at how this has been reflected in the Bank’s house journal otherwise known as the Financial Times.
Mark Carney, Bank of England governor, has delivered a “chilling” warning to Theresa May’s cabinet that a no-deal Brexit could lead to economic chaos, including a property crash that could see house prices fall by a third.
I pointed out on social media that whilst the journalists at the FT might find such a fall in house prices “chilling” first-time buyers would welcome it. Maybe they might start to find a few places to be affordable. So they might well welcome the fact that the FT then remembered that 35% is more than a third!
Among Mr Carney’s most stunning warnings was that house prices would be 35 per cent lower than would otherwise be the case three years after a disruptive no-deal Brexit — which would assume a breakdown in trading relations with the EU.
If you are wondering what would cause this then it was Governor Carney’s version of the four horsemen of the apocalypse.
The property crash would be driven by rising unemployment, depressed economic growth, higher inflation and higher interest rates, Mr Carney warned.
This is where the water gets very choppy for Governor Carney. This is because he has played that card before, and two of his horsemen went missing. Let me explain by jumping back to May 2016. From the Guardian.
The Bank warned a vote to leave the EU could:
- Push the pound lower, “perhaps sharply”.
- Prompt households and businesses to delay spending.
- Increase unemployment.
- Hit economic growth.
- Stoke inflation.
Missing from that list is the higher mortgage rates that he had suggested earlier in 2016. Three of the points came true to some extent as the Pound £ fell and due to it inflation by my calculations rose by 1.25% to 1.5%. This reduced real wages and hit UK economic growth. But unemployment continued to fall and employment rise. Also the delays in spending did not turn up. Or to be more specific whilst there may have been some investment delays, the UK consumer definitely did go on quite a splurge as retail sales boomed.
Where the Governor also hit trouble was on the recession issue. This was partly due to his habit of playing politics where he associated himself with forecasts suggesting there would be one. The actual Bank of England view was careful to use the word “could” but the HM Treasury one was not.
a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise
compared with a vote to remain.
Partly due to his own obvious personal views Governor Carney got sucked into this. It did not help that the HM Treasury report was signed off by the former Deputy Governor Sir Charlie Bean which gave it a sort of Bank of England gloss and sheen. The May 2016 Inflation Report press conference had question after question on the recession issue which illustrates the perception at the time. Then this was added to in July and August 2016 when the Bank of England and in particular its Chief Economist Andy Haldane again raised the recession issue by telling us the Bank needed a “Sledgehammer” response and then delivering it. Or half delivering it because by the time we got to the second part being due ( November 2016) it was clear that the chief economist had got it wrong. But that phase seemed to be driven by a Bank of England in panic mode looking at a later section of the HM Treasury report.
In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people
made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger. There is a credible risk that this more acute scenario could materialise.
Did the Bank of England Sledgehammer stop a recession?
Over the past 2 years this has come up a lot with journalists and ex Bank of England staff suggesting that it did. If so it would have been the fastest real economy response to monetary action in history. That would be odd at a time the ECB was telling us it thought the reaction function had slowed, But anyway rather than me making the case let me hand you over to Mark Carney himself and ony the emphasis is mine.
Monetary policy operates with a lag – long and
variable lag, as you know – and if there is a sharp adjustment in demand, in activity, from whatever event, it will take some time for stimulus, if it’s provided – if it’s appropriate to be provided – for it to course through the economy and offset, to cushion that fall in demand. ( May 2016 Inflation Report press conference)
Although he did later claim to have “saved” 250,000 jobs showing yet again the appropriateness of the word unreliable in his case.
This is another awkward area for the Governor as he is back to predicting higher interest-rates. The last time he did that he cut them! Still maybe he has learnt something as his critique of a future cut is a description of what happened after the August 2016 one.
“If you cut rates you would end up with higher inflation.”
Moving away from the Governor to the Chancellor he appears to be unaware that the deficit figures have improved considerably.
Mr Hammond said the Treasury would be constrained in its ability to tackle the crisis by boosting spending, noting the country was still recovering from the aftermath of the 2008 crash and questioning the effectiveness of a fiscal stimulus in one country.
There is a fair bit to consider here. Let us start with house prices which have proved to be rather resilient in 2017/18, and I mean the dictionary definition of resilient not the way central bankers apply it to banks and growth. I thought we would see the beginnings of some falls but whilst there have been some in London the national picture has instead been one of slowing growth. The ideal scenario in my opinion would be for some gentle falls to deflate the bubble.Some argue that it could be done by them being flat for a while but with wage growth seemingly stuck in the 2% to 3% range that would take too long in my opinion.
But house prices are too high and the Bank of England and the government have conspired and operated to put them there. The use of the word “help” in some of the policies has been especially Orwellian as the result of it is invariably to push house prices even higher and thus even more out of reach. So to them a 35% fall seems dreadful and I can imagine the gloom around the cabinet table as it was announced. The Governor would have been gloomy too as the fall would be slightly larger than the rises his policies have helped to engineer as we mull whether that is why 35% in particular was chosen?
So overall a 35% fall in house prices would bring benefits but it would not be a perfect policy. I have had various replies on social media from people who have recently bought and I have friends in that position. I wish them no ill which is why my preference is for the scenario I have outlined. But the housing market cannot be a one way bet forever .
Also let us take some perspective. You see there is little new in the forecast we have discussed today as it has been the Bank of England no-deal Brexit forecast for some time now. So let me finish on a more optimistic note tucked away in the FT article.
However, he boosted Mrs May’s position when he said that if she struck a Brexit deal based on her much-criticised Chequers exit plan presented to Brussels in July, the economy would outperform current forecasts because it would be better than the bank’s assumed outcome.
A reward for his extra seven months? At that point the Prime Minister might have mused how much nicer he might have been if she had given him an extra year.