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Bank of England (BoE) governor Andrew Bailey said in a speech that the UK must "welcome opportunities to rebuild relations" with the European Union following Brexit.

The central bank chief made the comments at the annual Mansion House financial and professional services dinner on Thursday evening.

The speech focused on the current state of the UK's economic growth and factors that could help tackle issues of potential supply.

One of which was the importance of openness in the economy.

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"Openness to trade in goods and services affects productivity by facilitating competition, innovation and specialisation," he said.

While Bailey reiterated that as a public official he took "no position on Brexit per se", the BoE governor said he did "have to point out consequences".

"The changing trading relationship with the EU has weighed on the level of potential supply," he said.

"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 UK voted to leave the European Union in a referendum in 2016, though Brexit officially came into place in January 2020.

'Not a good story'

In his speech, Bailey also addressed the UK's lagging economic growth, highlighting how it had continued to decline since the 2008 financial crisis and worsened since the onset of the pandemic in 2020.

"Bottom line — it’s not a good story," Bailey said.

According to BoE staff estimates, Bailey said that the average annual rate of growth of supply in the UK economy from 1990 to 2008 was 2.6%. Productivity contributed 2.2% to this figure, with 0.4% coming from labour supply.

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Following the financial crisis, from 2009 to 2019, the average annual potential growth rate fell to 1.3%, of which 0.3% came from productivity and the other 1% from labour supply.

From 2020 to 2023, this potential growth rate then dipped to 0.7%, with productivity contributing 0.5% and labour supply 0.2%.

Bailey said that this showed the "main contributor" to the fall in the potential growth rate was weaker productivity growth, with the Covid pandemic a "major factor" in causing a further decline.

The comments come ahead of the release of third quarter UK economic growth data on Friday morning, which showed the economy expanded by just 0.1% in that period, falling short of forecasts. This also marked a slowdown from the estimated 0.5% growth in the UK's gross domestic product (GDP) recorded in the second quarter.

Encouraging investment

To tackle this issue, Bailey stressed the importance of investment in the UK.

"Productivity growth is linked to capital deepening — so it is linked to investment," he said in the pre-prepared remarks.

According to data from the Organisation for Economic Co-operation and Development (OECD), which shows investment as a share of GDP, he said that the UK was "almost continuously at the bottom of the G7 league table since the late 1990s".

"Looking over the last 10 years, business investment in the UK has been particularly weak by G7 standards," Bailey said.

"We need to encourage business investment in the UK."

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Bailey said he welcomed plans set out by chancellor Rachel Reeves in the recent autumn budget, with the focus on public capital investment.

In Labour's first budget in 14 years, Reeves announced a boost of more than £100bn in public investment over the next five years.

"The second big need for investment is the financial system being organised to supply capital," said Bailey, adding that the UK pension system is "too fragmented".

In her own Mansion House speech on Thursday evening, which is an annual address given by the current chancellor, Reeves revealed steps towards developing develop eight pension "megafunds". This comes as part of reforms to Britain’s fragmented local government retirement scheme that she claimed could unlock £80bn of investment.