Leading article

It’s time for Mark Carney to stop fighting the Brexit referendum

26 May 2018

9:00 AM

26 May 2018

9:00 AM

Soon after he became his party’s leader, David Cameron spoke dismissively of Conservatives who ‘bang on about Europe’. He had a point. The subject has a peculiar ability to turn intelligent people into crashing bores who obsess over Europe to the exclusion of all else. Often, the subject warps good judgment. Since the referendum, this phenomenon has become much worse. More than ever, there is a desire to imagine that Brexit is behind every piece of news, good or bad.

Take the Bank of England governor, Mark Carney. He claimed this week that households are £900 worse off as a result of the referendum. Why? Because his officials had overestimated salary growth, and he sees the Brexit vote as an explanation for their error. This is odd. Given that the Bank has been getting its forecasts wrong for years, why blame Brexit?

Mr Carney is right in one area. Almost two years have passed since the vote, so we can now look at forecasts made at the time and compare them with the outcome. And, perhaps, see if there are lessons to learn. Take the ‘technical recession’ that Mr Carney warned might arrive straight after a Brexit vote. It did not materialise; instead, economic growth accelerated.

He wasn’t the only economist to have predicted recession: Barclays Capital envisaged the UK economy shrinking by 0.4 per cent over 2017, Credit Suisse foresaw a 1 per cent fall and Nomura a 1.3 per cent fall. Economists do, of course, routinely get things wrong. But the Bank of England considers itself a far superior form of intelligence-gathering: via its surveys, talking to employers, and much more.

Armed with such intelligence, the Bank made new forecasts after the Brexit vote, counting the ways in which it expected the sky to fall in. Exports would fall by 0.5 per cent in 2017, it said, a baffling assumption given that the fall in the pound was always likely to boost exports. In fact, exports went on to rise by 7.2 per cent.

Carney’s forecasters also envisaged a 2 per cent drop in business investment. The opposite happened: it rose by more than 2 per cent. Foreign direct investment also hit a record high.

The Bank’s rather hysterical claim that up to 10,000 City jobs would be lost before Britain leaves the EU now seems to be twice the real number, perhaps more. Employment in the financial sector has grown since the referendum. London’s advantages — the talent, the time zone, the vibrancy — are unconnected to EU membership. Its business is global and its main competitors Hong Kong, Singapore and New York. No other European city comes close, as Mr Carney’s colleagues ought to have known.

After the referendum, the Bank of England forecast that employment growth would stop altogether: the killer Brexit effect. The Bank’s intelligence network did not pick up that the employment boom had not even paused for breath: 320,000 jobs were created last year, even more than the Bank had envisaged in its rosy forecast before the vote. The boom continues: 197,000 jobs were created in the first three months of this year alone, forcing unemployment to its lowest since 1975. How could the Bank have missed so big a trend?

Mr Carney made the great mistake of taking sides during the referendum. He was personally recruited by George Osborne for this job, and may well have felt honour-bound to help the government when it was making a purely economic case against Brexit. He ought to have confined himself to saying that the Bank stood ready for all eventualities.

This matters because the Bank of England makes policy decisions based on its forecasts; it has a duty to be ruthlessly dispassionate and objective. For example, Mr Carney cut interest rates and indulged in yet more money printing after the referendum, convinced the economy was about to tank. It did not. But interest rates have been kept dangerously low, and as a consequence asset values (especially house prices) have been forced to eye-wateringly high levels. So Bank of England policy has real-world effects: promoting a sense of unfairness, even outrage, among those who are locked out of the housing market.

For each of the last eight years, economists have badly overestimated salary growth – usually by a margin greater than £900 a year. Getting earnings wrong has been one of the biggest and most regularly repeated errors in forecasting since the crash. For Mr Carney suddenly to blame Brexit for this long-standing trend is a sign of his own politicisation. It suggests he is more interested in his own exculpation than in asking why his officials get things so wrong.

The Bank of England chief economist, Andy Haldane, recently offered a more honest assessment: the forecasters have experienced their ‘Michael Fish moment’. He was comparing their errors to the evening in October 1987 when the BBC weatherman poured scorn on reports that a hurricane was on the way. The Met Office learned from that mistake, revised and improved its methods. Mr Carney would be well advised to do the same.

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