Bank of England governor says real incomes are significantly lower than forecast
British households are more than £900 worse off following the vote to leave the European Union, according to the governor of the Bank of England.
Comparing forecasts made by Threadneedle Street before the referendum, prepared on the basis of a remain vote, Mark Carney told MPs that household incomes were now significantly lower than expected.
“Real household incomes are about £900 per household lower than we forecast in May of 2016, which is a lot of money,” he said.
Speaking in front of the Treasury select committee of MPs, Carney also said the economy was 2% smaller than forecast before the EU referendum, despite the strength of the global economy and an emergency rate cut from the Bank after the Brexit vote.
“That’s a reasonable difference” to forecasts for the economy made in May 2016, he added.
Although admitting it was difficult to say with certainty that Brexit was the sole reason for lower household incomes, the Bank governor suggested the referendum outcome played a significant role. Previous analysis by economists has put the potential cost for each British household of voting to leave the EU at £600 a year.
Consumers have come under significant financial pressure from rising inflation since the Brexit vote, as the immediate drop in the value of the pound pushed up the cost of importing food and fuel to Britain. At the same time, wage growth has remained weak, despite the lowest levels of unemployment since the mid 1970s.
But after a year of falling living standards, earnings finally began to rise above inflation in February, signalling the worst of the pressure on household finances could be coming to an end. Still, average pay remains below its pre-financial crisis peak in real terms.
Besides the impact from inflation on household finances, Carney said investment spending by companies, which could drive up the productivity of firms and help to boost wages, had been weaker than expected since the Brexit vote. The strength of the world economy and availability of finance from the banking sector should have helped encourage firms to invest more, boosting the economy, he said.
“Over the course of the last year and a half, there has been an impact [from Brexit] relative to what we would’ve expected – even with some pretty good tailwinds at the back of this economy,” he added.
Despite the warnings over the short-term consequences of the vote for British households, Michael Saunders, a member of the MPC, told MPs the likely long-run negative impact of Brexit would be “modest”.
Pointing out that the economy did not weaken as much as the Bank forecast ahead of the referendum, he said: “It is likely that that long-run narrative is probably still intact. Obviously that’s something we will learn more about over time.”