Forget Boris, it’s Mark Carney who hit the Brexit nail on the head

The entire debate in Britain about how the UK will leave the European Union has so far been a giant version of the “dead cat strategy” — Lynton Crosby’s idea that by throwing a bizarre red herring into the discussion, voters will stop paying attention to the real issues.

Boris Johnson’s 4,200-word article in The Daily Telegraph on Saturday about his vision for Britain in a sunlit post-Brexit world was perhaps the pièce de resistance.

Despite the terrorist outrage the previous day, the media analysis of what the Foreign Secretary said, what he meant, and whether this was the start of a bid for leadership of the Tory party, dominated the print runs and airwaves for the next 72 hours.

Meanwhile in the real world, negotiations between London and Brussels over the details of the departure continued to go nowhere, with UK farmers the latest group to flag up the problems it is already causing.

Hundreds of miles away from the Westminster hurly-burly another man gave a speech, coincidentally about 4,200 words long. It contained no gags, Latin phrases, or verbal ruffling of blond hair, but instead charts, footnotes and precise economic analysis.

Giving the Michel Camdessus Central Banking Lecture in Washington — a must-attend event for global policymakers — Bank of England Governor laid out in cold clear detail the likely implications of and effect on economic growth, business profitability, productivity and employment of Brexit.

Britons have already seen shop prices rise

It makes for brutal but mandatory reading in these times when politicians only skim the surface. In his lecture, [De]Globalisation and inflation, he points out that Brexit will be unique in trying to turn and run in the reverse course from the experience of the past half century.  “It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated,” he says.

The first warning is that British firms will find it “challenging” to retain its role as a supplier of components to final goods that are exported beyond the continent. A third of UK exports are intermediate components for EU value chains.

Why? Firstly because trade costs such as tariffs hit those intermediate goods — semi-manufactured bits and pieces — more than other goods and secondly because alternative buyers of our bits and pieces will be hard to attract because they are based much further away. Proximity is key in trade.

What about inflation? Britons have already seen shop prices rise because of the 12% fall in the pound’s exchange rate against the euro, Carney warns we may only be at the start of the process. A 10% change in the exchange rate would therefore be expected to increase import prices by 6% and the level of consumer prices by 1.6% eventually. About half of the increase in import prices is passed through within the first year, with full pass-through taking around four years to complete.

we as a nation and its citizens will become poorer over the next three to four years

So three years to go, then. But of course the pound may weaken further: “Whether it ultimately appreciates or depreciates upon Brexit will depend on the terms of the final deal relative to market expectations at the time.” And the nature of the final deal is of course dependent on the power play between Johnson, Theresa May and David Davis.

Meanwhile Brexit-related uncertainties are causing some companies to delay decisions about building capacity and entering new markets, Carney says. Prolonged low investment will act as a brake on increases in productivity, while restrictions on getting labour from the rest of the UK will push wages up (no bad thing in itself).

But the net effect of all these factors the Bank warned earlier in the month is to make the next move in interest rates a hike, which would be its first increase since July 2007. With interest rates close to zero for much of the past 10 years households and businesses have built up a lot of debt. Only when rates start to rise will it be clear how deep the pain will be.

Carney was adroit in setting out some of the positives, saying leaving the EU “is intended: to enhance the UK’s ability to strike trade and investment deals with countries beyond those covered by virtue of its membership of the EU.

But in the meantime a distillation of his speech clearly points to the fact that we as a nation and its citizens will become poorer over the next three to four years. At some point there will also be a shortage of dead cats to throw on to the table. At that point neither Johnson’s classically-educated blether nor May’s robotic leadership will be enough to withstand the ire of a public — or hoi polloi as Johnson would say — that finally realise they have been cheated.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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