It goes without saying that nobody campaigning for the UK to leave the EU in the 2016 referendum ever spoke of the possibility of a cliff edge, no deal Brexit where the legal regime changes, literally, overnight. It remains far from clear if the UK government would allow such a situation to happen, but at the moment, without a deal being struck or a further substantive event (cancellation of A50 notice or a further referendum) it is the default position.
The governor of the Bank of England is a politically neutral figure, but as regular readers of this column will appreciate, it is now impossible to divorce the political from the purely economic. Mark Carney has spoken out against a “no deal” Brexit, urging politicians to find a solution. Carney warned that such an outcome at a time of rising global trade tensions and a slowing of China’s economy could create an “economic shock”.
Speaking in London’s Barbican centre, Carney noted: "It is in the interests of everyone, arguably everywhere that a Brexit solution is found. It is possible that new rules of the road will be developed for a more inclusive and resilient global economy. At the same time, there is a risk that countries turn inwards, undercutting growth and prosperity for all. A no-deal would be an economic shock for this country, and this would send a signal globally about re-founding globalisation. That would be unfortunate.”
Carney pointed out that Brexit had created a “high level of uncertainty” and consequently "companies are holding back on making big decisions". This, he argued, was why the UK needed to secure a good withdrawal agreement and have the transitional period (which would be abandoned in the case of a “no deal” scenario). He noted that recent global growth had peaked at 4% in 2016 and had been gradually slowing since. Whilst he believed that global growth would stabilise, rising trade tensions and a further slowdown in China could deflect this:
"The Bank of England estimates that a 3% drop in Chinese GDP would knock 1% off global activity, including half a per cent off each of UK, US and euro area GDP," Carney said.
He warned a "larger increase in tariffs of 10 percentage points between the US and all of its trading partners could take 2.5% per cent off US output and 1% off global output."
Carney made a general plea to politicians to address economic risks rather than simply ignore them, pointing out:
"Although the economic and financial imbalances in the global economy do not yet appear to contain the seeds of their own demise, global momentum is softening.”