Despite “extensive and expensive” preparations by banks, other UK businesses and the authorities, crashing out of the EU would deliver a “major economic shock” to Britain, the governor of the Bank of England said on Thursday.
Mark Carney said UK banks are strong enough to continue lending after a disorderly Brexit, even if that is compounded by a severe economic contraction caused by a global trade war. As for UK businesses, about 90 per cent have some form of contingency planning in place, he said, and the government has made progress in readying the country’s trade infrastructure such as ports and customs for a no-deal Brexit.
But the government is not “all the way there”, Mr Carney added, making the same observation about some UK exporters and noting that firms overall still expect “sales to go down, they expect employment to go down, they expect costs to go up and they expect the economy to slow” if Britain leaves without an agreement.
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“Even with a smooth adjustment, this would be a major economic adjustment, a major economic shock,” Mr Carney told reporters after the central bank released its half-yearly financial stability report.
The report warns of a negative impact on consumers and businesses from a likely “sharp” adjustment in the sterling exchange rate and in the prices of other UK assets following a disorderly Brexit.
The pound has already lost 15 per cent of its value since the start of 2016 against a basket of currencies that includes the dollar and the euro, according to the document.
Pressed further on the government’s preparedness, Mr Carney said: “It’s a huge exercise to rebuild the customs system from scratch and to build the necessary capacity in order to operate it in an economy that’s a just-in-time economy.
“It’s a marvel of just how integrated these economies are and how efficient they are under the current system, and it needs to shift from one system to another – potentially overnight…
“There is progress, but there is more to be done in terms of capacity and infrastructure, there is more to be done in terms of companies being plugged into the system, which is under the WTO rules as opposed to under a common market.”
Mr Carney also noted that the EU authorities have more to do to prevent disruption to financial services in the event of a no-deal Brexit. Although such disruption would primarily affect households and businesses on the continent, it could “spill back to the United Kingdom in ways that can’t be fully anticipated or fully mitigated”, he said.
Boris Johnson, the frontrunner to become the next prime minister, has insisted he will take Britain out of the EU on 31 October with or without a deal.