Brexit will have a negative impact on the UK’s economic growth “for the foreseeable future,” Bank of England governor Andrew Bailey has warned.
The economy is, however, likely to adjust and find balance again in the longer term, Mr Bailey, who was speaking at the G30 40th annual International Banking Seminar on Saturday, added.
The event in Washington, DC saw Mr Bailey highlight a decline in the UK’s potential growth rate from 2.5% to 1.5% over the past 15 years.
He linked this to lower productivity growth, an ageing population and trade restrictions – including post-Brexit economic policies.
“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,” Mr Bailey said.
“But, I quite often get asked a second question: what’s the impact on economic growth?
“And as a public official, I have to answer that question.
“And the answer is that for the foreseeable future it is negative.”
“But over the longer term, there will be – because trade adjusts – some at least partial rebalancing,” Mr Bailey added.
Referencing the works of 18th-century economist and philosopher Adam Smith, he continued: “Why do I give that answer? Because that’s the Smithian growth model: making an economy less open restricts growth over the long term.
“Longer term, you will get some adjustment. Trade does adjust, it does rebuild.
“And all the evidence we have from the UK is that is exactly what is happening.”
Investment in innovation and new technologies, including AI, may help address the decline in productivity growth in the long run, Mr Bailey said.
“If we take account of the impact of ageing and trade restrictions, we’re really putting our chips on investment,” he said.
“We’re putting our chips on general-purpose technology, and AI looks like the next general-purpose technology, so we need to work with it.
“We need to ensure that it develops appropriately and well.”
Mr Bailey warned that, although AI is likely to usher in a breakthrough in productivity long-term, it may “in the current circumstances, be a risk to financial stability through stretched valuations in the markets”.
“It doesn’t undermine the fact that AI, in my view, is likely, in addressing this slower growth issue, that we have and the consequences of it – that it is actually the best hope we have, and we really do need to do all we can to foster it,” he said.
The Bank of England governor’s prediction comes as Chancellor Rachel Reeves is under pressure ahead of next month’s Budget, with official figures showing muted growth in August following a surprise contraction in July.
The Office for National Statistics (ONS) said gross domestic product (GDP) rose by 0.1% month-on-month in August and fell by 0.1% in July, in a revision to the previous estimate for no growth.
In the three months to August, GDP grew by 0.3% compared with 0.2% growth in the three months to July, the ONS said.
The latest figures come after the International Monetary Fund (IMF) earlier this week forecast UK inflation was set to surge to the highest in the G7 in 2025 and 2026.
