Central banks cannot be expected to save the global economy if US rhetoric translates into an all-out trade war, Mark Carney has warned.
In a veiled jab at US President Donald Trump, the Bank of England governor said protectionist rhetoric is currently just “talk and tweets” but said there are already signs that the global economy is taking a hit.
“There are some tentative signs that this more hostile and uncertain trading environment may be dampening activity,” he said.
“For example, survey measures of global export orders and manufacturing output have fallen back from highs at the start of this year, and growth in US and euro-area capital goods orders fell to zero in Q1.”
Economic models by the Bank of England show that a 10 percentage point rise in tariffs between the US and all of its trading partners could knock 2.5% off US output and 1% off global output.
“The hit to global and UK GDP (gross domestic product) would be substantially greater if everyone put up tariffs against everyone else,” the governor warned.
Mr Carney said that while the Bank of England has been able to prop up the economy in the wake of the Brexit vote, conditions would not be as favourable in an all-out trade war.
“By the first quarter of this year, UK GDP had increased by 1 percentage point less than the MPC had projected just prior to the referendum,” he said.
“This is despite the fact that Brexit has not happened yet and that UK financial conditions have remained supportive since the referendum, in contrast to previous periods of elevated uncertainty.
“This in part reflects the package of easing measures implemented by the MPC in August 2016 and less stringent fiscal policy as well as the resilient global environment.
“In a general trade war, it is unlikely that global financial conditions would prove as robust, or that monetary policy could be as supportive.”
He said the final reading of economic growth for the first quarter, which was revised up from 0.1% to 0.2% last week, confirmed his view of the UK’s trajectory.
“Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate,” he said.
“A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1.”
The Office for National Statistics (ONS) said last week that the better growth outcome was thanks to an upward revision in construction output, which mainly reflected improvements in the way the sector’s work is measured by the statistics agency.
Mr Carney’s comments sent the pound higher against the US dollar, rising 0.15% to 1.325.
Sterling was down 0.1% versus the euro at 1.33.