Article 43VMS Bank of England warns no-deal Brexit would cause historic downturn - as it happened

Bank of England warns no-deal Brexit would cause historic downturn - as it happened

by
Graeme Wearden
from Economics | The Guardian on (#43VMS)

UK central bank outlines scenario of falling house prices, a sterling crisis and a shrinking economy, but critics aren't convinced

7.44pm GMT

Time for a recap:

The Bank of England has warned that a no-deal Brexit would trigger the worst UK downturn since the Great Depression. In a new scenario drawn up for MPs, the BoE outlined how:

*BOE'S DISORDERLY BREXIT SEES 8% GDP DROP, 25% POUND DECLINE #Brexit #GBPUSD #EURGBP

Lowering interest rates isn't going to open a port,lowering interest rates is not going to allow a bank in London to continue to operate in the continent if passporting has been taken away."

The level of preparedness of businesses and infrastructure,infrastructure such as ports, customs systems and transportation operations, will be important determinants of how well the economy adjusts to new trade barriers.

Evidence from surveys and other UK authorities suggests that the country is not yet fully prepared for a cliff-edge Brexit.

"Our job is not to hope for the best but to prepare for the worst." "We have looked at a potential no-deal, no-transition Brexit... the reason we do that is to be prepared for all eventualities."

The purpose of what we've released today... is not supposed to make people scared, it's supposed to provide reassurance that even if this happened, which is not likely, the system is more than ready for it.

7.38pm GMT

Guy Bradshaw, Head of Residential at UK Sotheby's International Realty, doesn't believe the Bank's forecasts either:

He says US citizens are already eyeing up UK property, which becomes more affordable if the pound weakens:

"To claim house prices will fall by a third is highly unrealistic, this is almost double the downturn in prices we saw in 2008. It is unlikely we will be walking away from the EU without a deal so this scaremongering is doing nothing to help a market which is already stagnating under punitive stamp duty costs as well as political and economic uncertainty.

"The biggest driver for London's prime property market next year will undeniably be foreign investment by individuals looking to hedge their bets with the good currency play. Already this evening we have spoken to a handful of American investors who have proactively reached out to us following the BOE's announcement. With the exchange rate potentially offering US buyers a 25% discount on properties this could be one of the smartest times to invest in London. These buyers are predominately from Miami and New York and are unphased by the proposed foreign buyer tax as they know they will recover these costs when the market bounces back.

7.20pm GMT

Henry Zeffman of The Times has a mischievous idea.....

A tantalising thought for all those enjoying Mark Carney's forecasts. He took British citizenship last week. Meanwhile in Westminster, some people are starting to mutter about a government of national unity - if only there was someone to lead it...

7.19pm GMT

The Financial Times says the Bank of England is warning of a 'historic' economic downturn:

A cliff-edge Brexit where the UK crashed out of the EU with no deal and no transition could lead to the country's GDP dropping by its sharpest ever levels, according to a new Bank of England analysis.

UK GDP could fall by as much as 10.5 per cent over a five-year period in the severest of Brexits, compared to its pre-referendum levels, while house prices could plummet by 30 per cent, the BoE said on Wednesday as part of its semi-annual scan of threats to financial stability.

A disorderly Brexit could wipe 8pc off UK economic output within a year, creating the worst slump since World War II, according to the Bank of England.

This would result in the Bank having to hike interest rates to 5.5pc in order to compensate for the sudden shock.

7.15pm GMT

Ouch. A Nobel-prize winning economist is questioning whether the Bank of England's analysis really stacks up.

Paul Krugman, an expert on trade, isn't convinced that the UK economy would actually shrink by 8% (a really massive contraction) in a no-deal Brexit.

Another trade discussion where I would like to believe the worst but not convinced: Brexit. The Bank of England just released some very dire scenarios 1/ https://t.co/0DvoT45JsS pic.twitter.com/xAeNTD8P6l

And I won't make a full judgement until I see the details. But their bad-case losses from a no-deal Brexit look extremely high. I mean, 8 percent of GDP was the kind of estimate we used to make for countries with 150 percent effective rates of protection. 2/

I don't understand how you can get that kind of cost without making some big ad hoc assumptions about productivity or something. And I have worried in all this about motivated reasoning on the part of people who oppose Brexit for the best of reasons 3/ https://t.co/hwpbhQvieL

As best I can tell, the big results depend on assumed relations between trade/FDI flows and productivity. It's really important to understand that this channel does not follow from basic trade theory and comparative advantage; it's a black-box story 4/

What we have are correlations between trade and investment flows and productivity that don't really follow from standard models. Are these causal? There is surely room for skepticism. Yet that seems to be the big driver of the whole thing. So I'm worried 5/

Again, I'm anti-Brexit, and have no doubt that it will make Britain poorer. And the BoE could be right about the magnitude. But they've really gone pretty far out on a limb here 6/

7.04pm GMT

Another Brexiteer MP has criticised the Bank's work:

Steve Baker on Carney numbers - 'the Governor is often one of our greatest statesmen but not, ironically, when he weighs into politics'

7.02pm GMT

Lukman Otunuga, research analyst at City firm FXTM, believes the Bank's analysis strengthens the prime minister's hand, as she tries to force MPs to back her deal:

On the bright side, the Bank of England stated that a close economic relationship with the EU could boost GDP growth by 1.75% over the next five years.

It seems investors are focusing on the positive aspects of the BoE's financial stability report to push the Pound higher. Today's report may offer Theresa May some ammunition when she sells her Brexit deal to parliament."

6.50pm GMT

Breaking away from Brexit, the New York stock market is surging after America's top central banker hinted that US interest rates won't rise as fast as expected.

My colleague Phillip Inman explains:

The outlook for economic growth in the US has grown uncertain, the US central bank chief Jerome Powell said on Wednesday as he signalled a slower pace of interest rate rises over the next two years.

Powell, who has angered Donald Trump this year with his determination to raise rates, said the Federal Reserve would pause to assess the impact of higher borrowing costs on US households and businesses.

6.43pm GMT

We shouldn't forget that the BoE is confident that the banking sector can cope with whatever Brexit throws at it.

Rob Smith, banking partner at KPMG UK, says today's stress tests have shown UK banks in a good light:

"The Bank of England is keen to paint a positive picture as we head into Brexit. The EBA put UK banks on the naughty step earlier this month whereas the Bank of England is clearly keen to emphasise their robustness.

6.31pm GMT

Here's Labour's shadow chancellor, John McDonnell, on the Bank's of England's Brexit forecasts:

"The Bank has confirmed what other independent reports this week have been telling us: a No Deal Brexit could be even worse than the financial crisis of ten years ago, and the country would be much worse under Theresa May's deal.

"Instead of ploughing on with this discredited deal the Government should set new priorities that would protect jobs and the economy."

6.30pm GMT

Two leading Brexiteer MPs have attacked the Bank of England for its gloomy assessment of a no-deal Brexit.

Jacob Rees-Mogg, head of the European Reform Group of backbench Conservative MPs, blasted Mark Carney's performance, saying:

"It is unusual for the Bank of England to talk down the pound and shows the governor's failure to understand his role. He is not there to create panic."

A second-tier failed Canadian politician who unfortunately we have running one of our most distinguished institutions who has trashed its reputation by his succession of hysterical and wrong forecasts.

Brexiteers launching full attack on Carney tonight. Jacob Rees Mogg tells @bbcnews he's overseeing "project hysteria" and calls Carney a "a failed second rate Canadian politician who is talking down the pound"

Rees-Mogg continues: 'The reputation of the Governor has plummeted by more than any economic indicator. It was always a mistake to appoint a Canadian politician to a senior economic role.'

"The Bank of England is undermining its credibility and independence by giving such prominence to these extreme economic forecasts and scenarios."

Does anyone really believe any of this as a real-world scenario? @bankofengland is undermining its credibility and independence by giving such prominence to these extreme scenarios and forecasts. https://t.co/q66u7rBtIq

6.13pm GMT

Here's the full quote from Mark Carney tonight, on how a no-deal Brexit could hit the UK economy hard:

In both scenarios, tariffs and other trade barriers are introduced suddenly next spring.

The UK recognises EU product standards but the EU does not reciprocate.

5.54pm GMT

If you're just tuning in, here's our news story about the Bank of England's warning that a no-deal Brexit would cause economic turmoil:

Related: Bank of England says no-deal Brexit would be worse than 2008 crisis

Related: UK banks can survive a disorderly Brexit, says Bank of England

5.43pm GMT

Q: In your scenario, would a UK recession in 2019 be less severe if interest rate were cut to zero?

Deputy governor Ben Broadbent says it all depends on Brexit's impact on the supply side of the UK.

5.40pm GMT

Q: Do you feel happier talking about Brexit risks now you have a UK passport, after becoming a UK citizen this month?

Mark Carney breaks into a grin, and reveals he doesn't actually have a passport yet ('the Home Office is busy'), but he does have citizenship.

Pleased to welcome Mark Carney, Governor of the Bank of England, to the Citizenship Ceremony at Camden Town Hall this morning pic.twitter.com/G3aC5XKe2y

5.38pm GMT

5.33pm GMT

Carney declines to say whether he outlined these dire no-Brexit scenarios when he brief the cabinet about the issue in September.

5.30pm GMT

Q: If your worst-case scenario came true, and there was an 8% decrease in the UK economy, would that be the worst year for the economy ever?

Apparently no! Britain suffered a 20% plunge in output after it rejoined the gold standard (in 1925), says deputy governor Ben Broadbent.

That was the last time the Bank gave advice to the government, to go back on the gold standard.

5.27pm GMT

On a cliff-edge Brexit, Carney says:

It is a possibility that we will have a no-deal Brexit with no transition.... The probability has increased with time. And our job has been to get the system ready.

5.26pm GMT

Q: Your worst-case Brexit scenario suggests that UK interest rates rise to 5.5% as the economy crashes, which is the absolute opposite of what happened in the 2008 crisis. So is it really likely?

Carney says that a no-deal Brexit would indeed be the opposite of the financial crisis. It was a demand shock.

5.20pm GMT

Q: Aren't you effectively endorsing government policy with this no-deal Brexit warning? And doesn't that undermine the independence of the Bank of England?

Mark Carney says the Bank of England is accountable to parliament, and parliament asked it to examine the impact of Brexit on the economy.

5.17pm GMT

Here's a video clip of Mark Carney discussing the impact of a no-deal Brexit.

"Our job is not to hope for the best but to prepare for the worst," Mark Carney says after Bank of England warns a no-deal Brexit may bring a savage recession https://t.co/05utySZdWz pic.twitter.com/oChUP7t9hv

5.17pm GMT

Q: What would happen to your growth forecasts if Britain didn't leave the EU?

Carney says you can 'mechanically extrapolate' Britain's growth rate at 2016, when the UK was running at 2% growth per year.

5.11pm GMT

Mark Carney has warned that some British firms are unprepared for a no-deal Brexit, or simply can't prepare.

The proportion of businesses that have drawn up, or activated contingency plans, are a fraction of the whole, the governor says.

5.07pm GMT

Mark Carney has warned that the UK is not "fully prepared" for a cliff-edge Brexit.

Q: Are you part of Project Fear?

5.05pm GMT

The Bank of England is ready for Brexit, whatever form it takes, governor Mark Carney says.

But he also warns that the Bank's powers are limited. Monetary policy can do little to offset the "potentially significant hits to productivity" that Brexit could bring.

5.02pm GMT

The Bank has also releases its Brexit analysis - and warned that crashing out of the EU without a deal would worst than the 2008 financial crisis.

My colleague Richard Partington reports from the Bank:

Britain crashing out of the EU without a deal would trigger a deep and damaging recession with worse consequences for the UK economy than the 2008 financial crisis, the Bank of England has warned.

Raising the stakes as Theresa May battles to win support in parliament for her Brexit deal, the central bank said that failure to reach a deal with Brussels - with no transition period to a new trading relationship - would spark an immediate economic crash.

4.59pm GMT

As this chart shows, the Bank's stress test is actually more testing than the 2008 financial crisis.

4.56pm GMT

Governor Mark Carney is speaking to reporters now, explaining that today's Brexit scenarios show 'what could happen, not what is going to happen'.

And they are certainly testing.

In the event of a disorderly no deal, no transition Brexit, Britain's GDP could fall by 8% from its level in the first quarter of 2019, according to analysis of a worst case scenario by the Bank.

The unemployment rate would rise 7.5% and inflation would surge 6.5%. House prices are forecast to decline 30%, while commercial property prices are set to fall 48%. The pound would fall by 25% to less than parity against both the US dollar and the euro.

4.54pm GMT

The Bank of England says it has tested whether UK banks could survive a 'worst case' assumptions about the challenges the UK economy could face in the event of a cliff-edge Brexit.

That includes:

4.48pm GMT

Here's the key messages from the Bank of England's stress tests of the UK banking sector.

Our stress test shows that UK banks could continue to lend in a scenario more severe than the financial crisis.

UK banks are prepared and strong enough to continue to serve UK households and businesses even through a disorderly Brexit.

The UK government is making sure the financial services UK households and businesses get from EU providers won't be disrupted.

Our latest #FinancialStabilityReport shows how we're making the financial system resilient to risks and prepared to be able to avoid possible future disruption. https://t.co/kxazrIzFZW pic.twitter.com/HVZju0UGjz

4.43pm GMT

BREAKING: All seven of Britain's major lenders have passed the Bank of England's stress tests, meaning they are strong enough to withstand a disorderly Brexit.

That means HSBC, Barclays, Royal Bank of Scotland, Lloyds Banking Group, Santander, Standard Chartered and Nationwide Building Society are all strong enough to ride out a no-deal departure, without needing to raise more funds.

"Based on a comparison of this scenario with the stress test, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit

"No bank needs to strengthen its capital position as a result of the stress test."

4.37pm GMT

City economists are getting impatient....

The Bank of England can't even produce its bank stress tests on time as it is now well past 4:30 pm....

4.33pm GMT

High drama as the Bank of England stress test results publication is delayed by TEN MINUTES due to technical issues

4.32pm GMT

Hold your horses.... there's a small delay.

Due to technical problems, the stress tests will be released at 4.40pm, along with the Bank of England's financial stability report and its analysis on the impact of Brexit

4.18pm GMT

David Madden of CMC Markets says the City is keen to see the stress test results:

UK banks will be in focus as the Bank of England stress test results will be announced after the closing bell of the London session.

Traders will be interested to find out how British bank would cope in the various different Brexit scenarios.

4.14pm GMT

It's nearly time for the Bank of England to release the results of its latest stress tests.

This annual exam will show whether Britain's biggest banks can handle a major downturn, or a disorderly event such as a no-deal Brexit.

3.59pm GMT

America's central bank has identified Brexit has one of the key threats to US financial stability.

In a new report, the Federal Reserve warned that a wide range of economic and financial activities could be disrupted if Britain leaves the EU without a deal.

An intensification of sovereign debt concerns or unresolved uncertainty about the implications of Brexit could lead to market volatility and a sharp pullback of investors and financial institutions from riskier assets, as occurred following the June 2016 Brexit referendum in the United Kingdom and earlier during the European debt crisis.

Because London is an important international financial center, U.S. banks and broker-dealers participate in some of the markets most likely to be affected by Brexit.

3.43pm GMT

Heads up: Donald Trump has just dropped a loud hint that he will impose new tariffs on car imports.

The president has tweeted that such a measure would protect US jobs, following GM's decision to close several factories.

The reason that the small truck business in the U.S. is such a go to favorite is that, for many years, Tariffs of 25% have been put on small trucks coming into our country. It is called the "chicken tax." If we did that with cars coming in, many more cars would be built here.....

.....and G.M. would not be closing their plants in Ohio, Michigan & Maryland. Get smart Congress. Also, the countries that send us cars have taken advantage of the U.S. for decades. The President has great power on this issue - Because of the G.M. event, it is being studied now!

3.31pm GMT

Tiffany's CEO, Alessandro Bogliolo, has told analysts that Chinese tourists have cut their spending in both the US and Hong Kong.

Explaining last quarter's underwhelming sales growth, he explained:

"What we have clearly seen in the quarter has been a shift in Chinese tourism and spending,.

So we have seen spending of Chinese jewelleries going down in important markets outside of China and we have seen strong sales in mainland China. This is a clear pattern that we have seen now since few months."

3.02pm GMT

US luxury jewelry vendor Tiffany & Co has been hit by a drop in Chinese tourists visiting America, sending its shares sliding.

Chinese economic growth declined to a post-global crisis low of 6.5 percent in the quarter than ended in September.

A trade fight with the Trump administration is pressuring communist leaders to energize economic activity that has weakened since Beijing clamped down on bank lending last year as it tries to rein in surging debt.

Shares of Tiffany tanking in the premarket on the back of its earnings $TIF pic.twitter.com/snPEIiUDhC

2.37pm GMT

Wall Street is open....and shares are rising in early trading.

The Dow has jumped by 150 points, or 0.5%, as investors hope that Donald Trump and Xi Jinping might agree a trade breakthrough when they sit down for dinner on Saturday.

U.S. markets open higher https://t.co/YvJ88xYsFS pic.twitter.com/YeRxNuDlIt

2.26pm GMT

Bloomberg's Bob Burgess has spotted that the US trade gap in goods has actually hit a record high....

Maybe this tariff thing isn't working so well? The U.S. merchandise-trade deficit widened to a second straight monthly record in October as exports fell pic.twitter.com/PFrS5Qwr3B

2.24pm GMT

Balraj Sroya, sales trader at Foenix Partners, thinks Donald Trump will welcome today's US GDP figures, confirming another solid quarter of growth:

The print surprisingly saw business investment pick up pace last quarter, while corporate profits bolstered to 6-year highs with the assistance of Trump's tax bill.

The stellar print strengthens Trump's negotiating hand ahead of trade talks with his Chinese counterpart Xi Jinping this weekend, as the US economy is proving resilient to recent pressures while the Chinese have not fared so well.

2.13pm GMT

Ouch! America's trade deficit has swelled, despite Donald Trump's attempts to close the gap between imports and exports.

The U.S. Census Bureau has reported that the international trade deficit jumped by $1bn in October to $77.2bn, as Americans bought more from overseas while selling less the other way.

The Oct. trade deficit in goods surged to a record $77.2 billion, as exports plunged and imports edged up. Sept.'s deficit was also upwardly revised. Since Trump has been president the U.S. is losing the most on trade in the history of the Republic. Talk of winning is fake news!

1.44pm GMT

America's economy grew faster than other advanced economies in the last quarter.

The second estimate of US GDP for Q3 has confirmed that it expanded at an annualised pace of 3.5%, matching the initial estimate.

*U.S. 3Q GDP GREW AT UNREVISED 3.5% PACE; EST. 3.5%

1.12pm GMT

Even Bitcoin is joining in the rally today.

The cryptocurrency has leapt by over 10% today, to $4,157 - its highest level since Sunday.

BITCOIN JUMPS FURTHER, NOW UP 10 PCT ON DAY AT $4,157 pic.twitter.com/jvEDLSP4Hx

12.57pm GMT

Thought For The Day: on the question of how central bankers extract themselves from their stimulus programmes.

Someone at the @ecb once told me that setting monetary policy is like packing your bag to go on holiday. When you leave you spend a lot of time thinking about what to take, and the order in which you pack. Coming back it doesn't really matter how you pack. https://t.co/TpSjMRK9hU

12.41pm GMT

The US stock markets are expected to open higher in a couple of hours, following Asia and Europe's lead.

Wall Street set for an upbeat open ahead of Fed Chair Jerome Powell's speech. Dow futures are up 115-points.

12.14pm GMT

Central bankers need a host of skills these days. Intellectual heft to deal with the data, and communication abilities - with the markets hanging on your every word - is a must.

But apparently, it also helps to be tall.

"Not tall enough." https://t.co/OPU1YLIvkL pic.twitter.com/HN4nxspcqF

11.41am GMT

Heads-up: Donald Trump has declared he is "totally" willing to see the US government shut down, unless it funds his border wall with Mexico.

In an interview with Politico, the president demanded that Congress sends him a bill approving $5bn for his wall on the US-Mexico border.

#TRUMP SAYS WILLING TO SHUT DOWN GOVT OVER BORDER WALL: POLITICOhttps://t.co/2jstWHLd8Q

11.15am GMT

Newsflash: President Xi has pledged to "sharply widen" the door to China's economy for foreign investors.

"China will make efforts to open, even more, its doors to the exterior world and we will make efforts to streamline access to markets in the areas of investment and protect intellectual property."

11.01am GMT

Asia-Pacific stock markets have closed, with most indices higher (but Australia ended flattish).

APAC Closing Prices:#ASX 5725.1 -0.06%#NIKKEI 22177.02 +1.02%#HSI 26682.56 +1.33%#HSHARES 10634.71 +1.14%#CSI300 3178.93 +1.33%

10.28am GMT

Uh oh.....

James Stewart, KPMG: "last week we heard from a FTSE100 FD who said 'help, we've had our head in the sand, we need to start planning (for Brexit)'."
#FTBrexit

Biz sec Greg Clark pretty clear at the FT Brexit event. A no deal Brexit would be "very significantly damaging" with "very significant disruption"

9.53am GMT

World stock markets have hit a one-week high this morning, on hopes of a thaw in U.S.-China trade relations, Reuters reports.

That's thanks to the rally in Asia, where markets in China, Japan and India all made gains, following a late rally on Wall Street.

"An expectation is being priced into markets ahead of the G20 meeting that we will see some deal or at least a framework for a deal between Trump and (Chinese President) Xi Jinping.

But if they come out with nothing this weekend, it's going to be very bad."

9.21am GMT

Donald Trump and Xi Jinping will have plenty of choices for their dinner date.

Argentinian authorities are putting Buenos Aires into a security lockdown tomorrow, ahead of the G20 summit, and encouraging residents to leave the City.

Related: Argentinian government urges Buenos Aires residents to leave city for G20

9.08am GMT

The flurry of quotes, headlines, and tweets from @realdonaldtrump in recent weeks about trade have left investors jittery, says Kit Juckes of Societe Generale.

He explains:

The impact of these "tape bombs" on short-term foreign exchange price action definitely seems bigger in recent months.

Market participants are more high-strung amid the downturn in global equities, credit, emerging markets and commodities. Also, much is riding on the Trump-Xi meeting this weekend. So tape bombs can shake things up in this febrile atmosphere, at least temporarily.

8.40am GMT

European stock markets have also opened positively, with small gains across the board.

His comments that US officials were having discussions at a number of levels of government has raised expectations about some form of agreement, though these comments were caveated with the proviso that China needed to do more for that to happen.

Equity markets have chosen to focus on the positive with Asia markets also pushing higher ahead of the key meeting on Saturday with President's Trump and Xi.

8.25am GMT

Hopes of a trade war breakthrough at the Trump-Xi dinner date has lifted shares in Asia today.

Equities markets in Asia-Pacific posted gains on Wednesday despite the White House casting doubt on the potential for a resolution of the US-China trade war at the G20 meeting later this week.

As the market prepares for the dinner date of the century, regional equity investors are expressing a sense of relief that there may be light at the end of Trump's trade war tunnel despite the ideological differences that were on full display at the Asia-Pacific Economic Cooperation summit.

But last nights heavy -metal headline assault should be a clear-cut reminder that when worlds leading free economy and the worlds best example of state-directed capitalism meet face to face, things can go sideways in a hurry.

8.11am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

"President Xi has an opportunity to change the tone and the substance of these talks.

This is a big opportunity. President Trump has indicated he's open. Now we have to know if President Xi is open."

Larry Kudlow: White House is having 'a lot of communication with the #China government at all levels' ahead of critical #Trump-Xi meeting at #G20 - CNBChttps://t.co/aKczGkO182

Huge day tomorrow for PM in pressurising her MPs to back her deal - because Dexeu and government economic service will show something close to her deal much better for prosperity than Canada Plus. And Bank of England will show no-deal Brexit an economic car crash. Will enough...

...MPs be sufficiently scared to drop their opposition to her Brexit plan, or will they persist in maintaining that the negative prognostications are Establishment scaremongering?

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