Brexit will have a negative impact on the UK's economic growth "for the foreseeable future," Bank of England governor Andrew Bailey has warned. 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.
Bailey linked this decline to lower productivity growth, an ageing population and trade restrictions - including post-Brexit economic policies. However, he said the economy is likely to adjust and find balance again in the longer term as trade patterns adapt.
Bailey's assessment as public official
The Bank of England governor emphasised his neutral stance on 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.
However, when asked about the economic impact, he said he must provide an honest assessment. "And the answer is that for the foreseeable future it is negative," Bailey stated. "But over the longer term, there will be - because trade adjusts - some at least partial rebalancing."
Economic theory behind the warning
Bailey referenced 18th-century economist Adam Smith to explain his position. "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.
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.
AI opportunities and risks
While Bailey sees AI as potentially the "best hope" for addressing slower growth, he warned of near-term 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 emphasised the importance of fostering AI development. "It is actually the best hope we have, and we really do need to do all we can to foster it," Bailey said.
Current economic pressures
Bailey's comments come as Chancellor Rachel Reeves faces pressure ahead of next month's Budget. Official figures show muted growth in August following a surprise contraction in July, according to the Office for National Statistics.
GDP 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.
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, adding to economic challenges facing the government.
Sources used: "PA Media" Note: This article has been edited with the help of Artificial Intelligence.
