OK. let's start with the Bank of England report. For reference here is the PDF if anyone wants to actually read the whole thing and not just the twitter highlights;bankofengland.co.uk/-/media/boe/fi…
Let's start with a defence of the BoE. The banks analysis represents scenarios, not a forecast. This is an important distinction to make. A scenario relies on making a series of connected assumptions and then mapping out what happens from there. Here ends the defence of the BoE
The first critcism, as noted by many, is that the BoE only looked at negative scenarios. It did not consider any more positive scenarios that might come from a no-deal Brexit. The entire document as a result carries something of a natural bias.
This could partly be justified in that the BoE is more concerned with things going wrong than things going right, but given the banks remit for the report was not just to look at negative scenarios, this line of argument seems difficult to justify.
Let's cut to the chase and move on to the main graph which has been all over twitter (Chart A on page 7). The grey line at the top represents the bank's assumption of where GDP was headed circa May 2016. Most of the banks scenarios work off this as a baseline.
Note that the chart actually shows growth trending much lower at the point marked May 2016 than the grey line that follows, which appears to be based off a point selected after May 2016. Using the actual May 2016 trend, the line would actually fall under actual the current trend.
This is problematic for the bank because it would imply, contrary to their past analysis, that the UK has actually performed slightly better since the referendum than it was before hand. I'm sure this had no bearing on their choice of starting point.
Let's move now to their "disorderly" scenario, which has GDP falling by as much as 7% compared to the current trend over a period of about six months.
This would represent an unprecedented fall in GDP for the UK, greater even than the 3 quarter drop in GDP between 2008 Q3 and 2009 Q1. Indeed, that 7% drop would be greater than the entire GDP loss from all five quarters of the recession.
In financial terms it would represent the loss of about £140 billion of activity in less than a year. That's 2.5 Tescos going bust (obviously the entire company, not just one store). Where the BoE got this figure from, only they know, but it has no basis in reality.
The scenario construct itself appears to offer no indication of any action being taken by the government. This was similar to the Treasury's "shock, severe shock" scenario prior to the referendum. As interesting as that is as a though exercise, it lacks an credibility.
As an assumption it is the equivalent of saying "You come down in the middle of the night because you smell something burning. You find your kitchen on fire. You yawn and go back to bed. Here's what happens next".
At this point you may now safely close the BoE analysis. You will never need to look at it again. It is so deeply and (given the political climate) irresponsibly flawed as to be unworthy of any more of your time. It should probably come with a resignation letter.
