The Bank of England today cut its forecasts for economic growth, with Carney warning activity could slow further if trade becomes more difficult.
Speaking today at the Bank, Carney said: “Any agreement that reduces access to aspects of our largest trading partner is likely to reduce the level of economic activity in this country.”
Gaining a transition deal is “important”, he said, although he added that the “bigger question” for the economy after Brexit will be the form that the longer-term trade arrangement takes.
The issue of what form a transitional deal should take has risen to the top of the list of priorities for the government, after pressure from businesses keen to avoid a “cliff edge” in trading arrangements.
The government has said that free movement will end after Brexit in March 2019, although it is unlikely that would work with continued access to Europe’s Single Market, raising concerns among those British businesses who trade significantly with the EU.
Government must “hit the ground running” with a clear transition plan when politicians return to Parliament after the summer recess, according to Tej Parikh, senior economist at the Institute of Directors, with “shaky economic confidence” affecting investment decisions.
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Carney today also warned that uncertainty was weighing on growth prospects, harming the investment which the Bank expects to make up for sagging consumer spending.
He said: “Uncertainty about market access post-Brexit is starting to affect some business decisions and it has consequences for investment.”
The uncertainty means the UK economy has a “deteriorating” risk outlook, according to Markus Kuger, senior economist at ratings agency Dun and Bradstreet, “until there is more clarity on how Brexit will impact businesses operating in the UK market.”
The uncertainties are also affecting Bank policy, according to Yael Selfin, chief economist at accountant KPMG.
She said: “Uncertainties around the Brexit transition and future UK/EU trading relationships make future interest rates movements less easy to anticipate at present, but this should not discourage businesses and households from preparing for a future with higher rates.”