Brexit will have a negative impact on the UK's economic growth "for the foreseeable future," Bank of England governor Andrew Bailey has warned. However, the economy is likely to adjust and find balance again in the longer term as trade patterns adapt.
Speaking at the G30 40th annual International Banking Seminar in Washington DC on Saturday, Bailey highlighted that the UK's potential growth rate has declined from 2.5% to 1.5% over the past 15 years. He linked this decline to lower productivity growth, an ageing population and trade restrictions including post-Brexit economic policies.
Bailey's neutral stance on Brexit
The Bank of England governor emphasised his careful approach to Brexit as a political decision. "For nearly a decade, I have been very careful to say that I take no position per se on Brexit, which was a decision by the people of the UK, and it is our job as public officials to implement it," Bailey said.
When pressed about the economic impact, Bailey said he must provide an honest assessment as a public official. "And the answer is that for the foreseeable future it is negative," he stated. "But over the longer term, there will be - because trade adjusts - some at least partial rebalancing."
Economic theory behind the assessment
Bailey referenced 18th-century economist Adam Smith to explain his position on trade restrictions. "Because that's the Smithian growth model: making an economy less open restricts growth over the long term," he said.
He noted that evidence from the UK shows trade is already adjusting and rebuilding as predicted by economic theory. Trade does adjust and rebuild over time, with all UK evidence pointing to this happening, Bailey explained.
AI as potential solution and risk
Investment in innovation and new technologies, including artificial intelligence, may help address the decline in productivity growth in the long run. "We're putting our chips on general-purpose technology, and AI looks like the next general-purpose technology," Bailey said.
While Bailey sees AI as potentially addressing slower growth issues, he warned of near-term financial stability risks. AI may "in the current circumstances, be a risk to financial stability through stretched valuations in the markets," he cautioned.
Despite these concerns, he described AI as "the best hope we have" for addressing growth challenges. "We really do need to do all we can to foster it," Bailey emphasised.
Current economic pressures
Bailey's comments come as Chancellor Rachel Reeves faces pressure ahead of next month's Budget following disappointing economic data. Official figures show gross domestic product rose by 0.1% month-on-month in August and fell by 0.1% in July, representing a revision from the previous estimate of no growth.
In the three months to August, GDP grew by 0.3% compared with 0.2% growth in the previous three-month period, according to the Office for National Statistics. The International Monetary Fund earlier this week forecast that UK inflation is set to surge to the highest in the G7 in 2025 and 2026.
Sources used: "PA Media" Note: This article has been edited with the help of Artificial Intelligence.
