Brexit is damaging the UK economy more than necessary because businesses have had unrealistic expectations of how quickly it would be resolved, the Bank of England’s deputy governor said in a clear rebuke to the government for its chaotic handling of negotiations.
The sustained fall in UK business investment over the course of 2018 was “remarkable” at a time at when the economy had been growing, profits healthy and employers adding jobs, Ben Broadbent told an audience at Imperial College Business School in London, adding that despite a slight pick-up at the start of 2019, the underlying trend still appeared negative.
The most plausible explanation was that rising uncertainty — in particular, the fear of a no-deal, no transition Brexit — had made firms reluctant to commit to capital investment that would be costly to reverse if things went wrong. Instead, they had met new demand by taking on staff — to the detriment of productivity.
Delaying investments in this way made sense when uncertainty was likely to last only a short time; but a long wait meant forgoing profits, so firms that did not expect a quick resolution may decide to “get on with things and make the investment anyway”, Mr Broadbent said.
This explained why the impact of Brexit uncertainty seemed to intensify in the run-up to the assumed exit date of March 2019, he said. It also meant that “investment suffers more than it needs to if firms repeatedly expect things to be resolved sooner than they actually are,” he added.
Mr Broadbent was speaking as Theresa May, the prime minister, prepares to present MPs with a “new and improved” offer on Brexit before calling a further vote on the withdrawal deal they have already rejected three times.
“A repeated series of cliff edges, each of which is expected to be decisive but in reality just gives way to the next cliff, is more damaging . . . than if it had been clear at the outset that the process will take time,” he said.
However, the BoE deputy governor made it clear he was not advocating a no-deal Brexit — the outcome many businesses fear if Boris Johnson replaces Mrs May as prime minister — as preferable to continued uncertainty.
Deliberately choosing the outcome companies feared most “will probably make things worse. It’s likely to mean that projects delayed will instead be cancelled”, he said.