Britain on way to long-term decline without EU, warns Bank

Andrew Bailey urges Chancellor to forge stronger post-Brexit relations after Trump victory

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Britain must rebuild trade ties with Europe to help stem the economy’s long-term decline, the Bank of England Governor has told Rachel Reeves.
In a major intervention in the wake of Donald Trump’s US election victory, Andrew Bailey urged the Chancellor to “welcome opportunities to rebuild” post-Brexit relations with the Continent as Ms Reeves orders regulators to focus on growth as part of plans to fire up the City.
Addressing an audience of bankers at the annual Mansion House dinner, Mr Bailey said that the UK’s economic performance since the 2008 financial crisis was “not a good story”, warning that Brexit had “consequences” for growth.
The Chancellor echoed Mr Bailey’s remarks, as she renewed Government calls for a “reset” with the European Union after blaming Brexit for some of the UK’s economic woes.
She identified Britain’s departure from the EU as a key driver of the “structural challenges” facing the economy”.
However, as well as forging stronger ties with Europe, she also vowed to expand trade links with the US and China amid a backdrop of rising global tensions.
She said: “We will not be reversing Brexit or re-entering the single market or customs union, but we must reset our relationship.”
The Chancellor also issued a thinly veiled rebuke to Mr Trump’s call for more tariffs, as she called for “free and open” trade to boost the economy.
She also singled out the US as Britain’s “single most important destination for financial services trade.”
Meanwhile, Mr Bailey also suggested Mr Trump’s return to the White House and broader geopolitical tensions threaten free trade, identifying closer trade ties with Europe as an area for future growth.
Signalling Brexit has stunted the UK’s growth potential, Mr Bailey said: “The changing trading relationship with the EU has weighed on the level of potential supply.”
“The impact on trade seems to be more in goods than services, that is not particularly surprising to my mind. But it underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people.”
The US President-elect has pledged to slash the state and launch a fresh wave of tax cuts and deregulation in his second term, but has also reignited fears of a global trade war by threatening to impose blanket tariffs of up to 20pc and 60pc on China.
Ms Reeves sought to reassure the City that she has a growth strategy following a furious backlash against a record £40bn tax raid in her maiden Budget.
The Chancellor used her first Mansion House address to rip up financial red tape and pledge to relax rules she believes are holding back the economy.
“The UK has been regulating for risk, but not regulating for growth,” she said, adding that rules introduced after the financial crisis to make the system safer have “gone too far”.
Mr Bailey warned that UK growth over the past three decades has become increasingly lacklustre, putting the economy closer to its European neighbours than the US, where productivity – a key ingredient for rising living standards – has grown much faster.
He said that weak productivity growth has reduced the speed limit of the economy and increased inflationary pressures, with potential growth halving in the decade to 2019 to just 1.3pc compared with its pre-crisis average.
Mr Bailey added that Covid lockdowns have been a “major factor in causing a further fall” in Britain’s growth potential, with official figures showing productivity in the public sector suffered much more during the pandemic. “Covid was clearly a major factor here,” he said
“It was clearly a huge shock to the economy. Rather, the more important question is whether and to what extent Covid has left a lasting impact on potential supply?”
Commenting on the UK’s wider performance, Mr Bailey added: “The UK looks rather more like other parts of Europe than this continent does relative to the US. The US has a better story to tell.”
While Mr Bailey insisted that he is “tak[ing] no position on Brexit per se,” he added: “I do have to point out consequences.”
Ms Reeves used her speech in the Square Mile to warn that measures brought in since the financial crisis to “eliminate risk” have had “unintended consequences” in holding back growth.
Describing financial services as “the crown jewel in our economy” Ms Reeves said she will seek to secure the City’s reputation as a “global success story”.
Announcing a series of reforms aimed at driving competition across financial services, Ms Reeves said she was changing the remit of the Bank of England and City regulator to be more “growth-focused”.
The Chancellor will overhaul the consumer redress aimed at giving customers and businesses “clearer expectations” about how compensation claims will be dealt with in the future, the Treasury said.
She also confirmed plans to merge local government and workplace pension schemes into a series of “megafunds” worth more than £50bn.
Post-crisis rules designed to make senior bankers and executives more accountable for corporate failures will also be relaxed, including replacing red tape that forces firms to prove leaders are “fit and proper” every year.
The Bank of England is already taking steps to relax pay rules that will allow senior bankers faster access to their bonuses.
Regulators have admitted that the UK is an “outlier” in making some of the highest paid bankers wait up to eight years for their bonus payments in a policy regulators conceded is “damaging for competitiveness”.
Ms Reeves has previously made clear that Labour will not reinstate a bankers’ bonus cap.
Ms Reeves has written to the Financial Conduct Authority, Prudential Regulation Committee, Financial Policy Committee and Payment Systems Regulator to underscore the importance of this focus.
She has said plans for pension “megafunds” could result in around £80 billion to invest in businesses and infrastructure.
“Taken together, these measures represent the most pro-growth financial services package since the financial crisis,” she said.
“While it was right that successive governments made regulatory changes after the Global Financial Crisis, to ensure that regulation kept pace with the global economy of the time, it is important that we learn the lessons of the past.
“These changes have resulted in a system which sought to eliminate risk-taking. That has gone too far and, in places, it has had unintended consequences which we must now address.”
In a separate warning, a Bank of England rate-setter warned that Mr Trump’s trade war could hit growth and push up consumer prices in the UK.
Catherine Mann, who sits on the Monetary Policy Committee deciding interest rates, said the splintering of the world economy would “likely put upward pressure on costs and prices”.
Her remarks at the Annual Conference of the Society of Professional Economists in London come as Mr Trump is poised to re-enter the White House in January on a mandate of cutting taxes by aggressively raising tariffs.
Ms Mann said that even uncertainty more broadly about trade policy risked having “damaging economic effects and increase volatility”.
She said: “The latest political developments across the Atlantic have not made a disorderly trade scenario less likely, which would have consequences for output and inflation in the UK.”
The rate-setter is known as the hawk-in-chief on the Bank of England’s nine-person panel setting interest rates, preferring higher borrowing costs when faced with uncertainty.
Ms Mann said that factors like protectionism, climate change and higher government spending could trigger more unstable inflation in coming years.
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