In Focus Consumer Credit
Fading global tailwinds, intensifying Brexit headwinds
Business investment and household confidence are both being impacted by concerns ahead of the Brexit decision
Gertjan Vlieghe External member of the Monetary Policy Committee, the Bank of England
We are in a period of unusual uncertainty around the economic outlook. There is a tendency to say every quarter that things are more uncertain than before, and of course that cannot always be true. It must be that sometimes uncertainty is less than it was before. But where we are today, in the middle
of the Brexit debate, and with the world economy slowing meaningfully relative to a year ago, I do believe the UK outlook is unusually uncertain, and the nature of the uncertainty is different (Figure 1). In addition to uncertainty about different
economic drivers of demand or supply across the economy, for which we have models and data, the range of current geopolitical risks is both less amenable to quantifying in our framework and has more uncertain policy implications. And these risks have been playing an increasingly important role in the evolution of the economy in recent months. Setting monetary policy does require
making decisions even when the outlook is uncertain. As I have said before, we do not need to anticipate perfectly all future changes in the economy in order to set
monetary policy appropriately to meet our inflation target. Rather, we need to respond to news about the economy as we receive it, in a systematic and predictable way that agents in the economy can factor into their decisions. Monetary policy will do what is needed to
bring inflation back to target, whatever the path for Brexit and the world economy. Before wading into a Brexit-related
discussion during a period of heightened political sensitivity, I want to make something very clear. For the UK’s voters and politicians, the
Brexit debate is about decisions with significant long-term economic and political consequences, and there is an important democratic debate on the possible trade-off between them. Even if there is a strong consensus on the
negative economic impact of Brexit, the magnitudes are highly uncertain, particularly over the longer term. It is perfectly reasonable to have a debate
about whether it is worth incurring these aggregate economic costs to achieve certain political objectives. As an MPC member, I am making no comment on this debate,
Fig 1: Global Policy Uncertainty Index Fig 2: Synthetic growth vs data
Even if there is a strong consensus on the negative economic impact of Brexit, the magnitudes are highly uncertain, particularly over the longer term
which is clearly beyond the scope of monetary policy. I will only discuss the short-term impact on the economy, that is on growth, slack, and inflation, because that is the MPC’s mandate. It is important to be absolutely clear that
my comments on the economic impact of Brexit-related news over the monetary policy-relevant horizon, meaning the next two to three years, are not a comment about desirability of certain Brexit outcomes over others. But the MPC does have to set monetary
policy while the Brexit debate is happening, and monetary policy works best if its rationale and intentions are well understood.
Fig 3: GDP shortfall vs ‘synthetic UK’
>>
March 2019
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