MADRID – The collapse in United Kingdom business investment since the country’s 2016 vote to leave the European Union highlights the potential costs to the global economy of a prolonged period of uncertainty about tariffs and other barriers to trade, Bank of England Governor Mark Carney said on Tuesday.
Figures released on Monday showed UK business investment fell in 2018 at the fastest pace since the global financial crisis, a reflection of the uncertainty among businesses regarding the country’s future trade relationship with the EU, which it is scheduled to leave next month.
In a speech to businesspeople in central London, Carney said the performance could serve as a leading indicator for the global economy if outstanding disputes between the United States and China, and between the US and the EU, are not settled soon.
“A prolongation of global trade uncertainty could undermine the global expansion,” Carney said. “Most fundamentally, the larger and the more permanent the disruption to global trade, the greater the deglobalization, the greater the reduction in both activity and supply capacity of economies.”
Another round of US tariff increases on imports from China is due to be implemented on March 1, but those hikes may be averted by high-level talks taking place in Beijing this week.
BOE economists estimate that an increase of 10 percentage points in the tariffs charged by the US on all of its imports would cost 2.5 percent of that country’s gross domestic product, and 1 percent of world output.
“If business confidence and financial conditions are also affected, as recent experience suggests they would be, these impacts could double,” said Carney.
China’s economy is already slowing, and Carney said trade tensions with the US have contributed to that weakening. He also highlighted the threat to China’s economy from a rapid rise in debt since the global financial crisis.
“China is the one major economy in which all major financial imbalances have materially worsened,” he said.
Carney said the UK’s departure from the EU could pave the way for a form of globalization that is based on greater voice for voters, but hoped clarity on the form it will take would come soon.
“It is in the interests of everyone, arguably everywhere [...] that a Brexit solution that works for all is found in the weeks ahead,” he said.