Business investment in the UK had fallen by 0.5% in 2019 Q2, and had now declined in five of the past six quarters, according to The Bank of England’s Monetary Policy Committee (MPC) meeting ending on 18 September 2019, which also voted unanimously to maintain Bank Rate at 0.75%.
Contacts of the Bank’s Agents had continued to report weak investment intentions, in part due to the soft global environment but primarily due to Brexit uncertainties.
Results from the Agents’ latest Brexit survey suggested that companies who judged themselves not ready for a no-deal Brexit had the weakest investment intentions and that they were also expecting the weakest output and employment outturns over the next year in a no-deal scenario.
While the level of uncertainty had remained highest for those who exported the most to the European Union, it had also risen for other firms exposed to the European Union through more indirect channels such as imports and migrant labour.
According to the minutes of the MPC, the UK bank funding costs had been little changed compared with those prevailing at the time of the previous MPC meeting.
However, according to the CBI Industrial Trends Survey, the availability and cost of corporate credit had increased as a concern but had remained fairly low down the list of factors judged by companies to be limiting investment, with uncertainty about demand continuing to be identified as the most significant constraint.
That was consistent with intelligence from the Bank’s Agents, with most large companies noting that credit remained readily available.
The Agents had, however, noted some indications that credit conditions may be tightening for some small and medium-sized companies, and in a few particular sectors (these were not detailed).
Brexit uncertainties have continued to weigh on business investment, although consumption growth has remained resilient, supported by continued growth in real household income.
There had been little news in household credit conditions since the previous MPC meeting.
Too much uncertainty and volatility
Brexit-related developments are making UK economic data more volatile, with GDP falling by 0.2% in 2019 Q2 and now expected to rise by 0.2% in Q3. The Committee judges that underlying growth has slowed, but remains slightly positive and that a degree of excess supply appears to have opened up within companies.
“It is possible that political events could lead to a further period of entrenched uncertainty about the nature of, and the transition to, the United Kingdom’s eventual future trading relationship with the European Union,” said the report.
That could be code for stockpile imported Christmas presents and booze before 31 October.
Shifting expectations about the potential timing and nature of Brexit have continued to generate heightened volatility in UK asset prices, too, in particular the sterling exchange rate has risen by over 3½% since the last MPC meeting.
Increased uncertainty about the nature of EU withdrawal means that the economy could follow a “wide range of paths over coming years”, said the report.
That could be code for we are all trying to conduct business as usual in a haze of uncertainty and it is causing many a sleepless night. There are reports that say that uncertainty causes people more stress than being certain of a bad situation.
But back to the report…
“The longer those uncertainties persist, particularly in an environment of weaker global growth, the more likely it is that demand growth will remain below potential, increasing excess supply. In such an eventuality, domestically generated inflationary pressures would be reduced,” said the MPC statement.
The appropriate response of monetary policy will depend on the balance of the effects of Brexit on demand, supply, and the sterling exchange rate, said the report.
The MPC reported that in the event of a no-deal Brexit, the exchange rate would “probably” fall, CPI inflation rise and GDP growth slow.