Productivity growth to slow as Britain exits EU, says BoE's McCafferty

Productivity growth is likely to weaken while the economy adjusts to leaving the European Union, a Bank of England committee member said on Tuesday.

Ian McCafferty said in the annual report to the Treasury select committee that as the economy adapts to a post-European Union future, with changed trading and investment patterns, it will need a reallocation of resources between tradable and non-tradable sectors, and between sectors whose access to export markets may have changed, which is likely to affect supply.

"During the transition period at least, the reallocation of resources is likely to be associated with some reduction in productivity growth and hence a lower rate of growth of economic potential."

He said that while consumer confidence and spending have held up since June’s EU referendum, business surveys have suggested that the increasing uncertainty has affected corporate investment, which has weakened in both capital equipment and commercial property, which “is likely to prove a drag on growth, relative to the pre-referendum period”.

The nature of Britain's exit from the EU and the trading relationships that will be forged will affect the exchange rate.

If the economy becomes less open “the equilibrium exchange rate will be lower than prior to the decision to leave” and adjusting to the new equilibrium will have a potentially important influence on the economic outlook of the country.

“To the extent that the exchange rate falls, as it has done since the referendum was announced, inflation will be higher, and by extension, real income growth constrained, relative to a world in which the exchange rate had not moved.”

McCafferty also said projections were uncertain, leaving the future path of interest rates unclear and dependent on the development of the economy.

Earlier the Office for National Statistics revealed that inflation unexpectedly shrank in October. The consumer prices index increased 0.9% in the year to October, which was down from the 1% rise in September, but short of the 1.1% rise expected.