Bristol Business Blog: Donna Kehoe, regional agent, Bank of England. Modest growth ahead as uncertainty weighs on businesses

August 10, 2017
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By Donna Kehoe, Bank of England agent for the South West of England

I always enjoy the conversations I have each day with those running businesses, charities and other organisations here in the South West.

These discussions provide an up-to-the-minute insight into what’s really happening in the economy across the UK.

And at the moment there’s certainly no shortage of things to talk about – whether that’s the prospect of Brexit, the rise in inflation or the challenge of finding skilled staff. 

The information gathered by me and my colleagues in the Bank of England’s Agency network feeds directly into our policymakers in London as they make decisions on how best to guide the economy through these somewhat uncertain times. 

The Bank last week published its August Inflation Report, its latest quarterly assessment of the outlook for the economy.

It also announced that the bank rate, which is a reference point that banks use when setting interest rates on savings and loan products used by households and businesses, would remain on hold for the time being at 0.25%.

The Monetary Policy Committee (MPC) – which sets bank rate – also said that the rate would likely have to rise in the coming years in order for the MPC to hit its 2% inflation target.

Inflation is currently above that figure, largely because the value of the pound fell sharply following the vote to leave the European Union.

Weaker sterling makes imports more expensive for UK companies and that has resulted in higher prices for UK households. We expect inflation to peak towards the end of this year at around 3% before falling back towards 2%.

Meanwhile, wages have increased more slowly than inflation, so households’ real spending power has been squeezed. 

At the same time, unemployment levels are the lowest they have been since the 1970s, which means many companies are finding it harder to recruit new staff. 

It’s a story I hear frequently when I speak to employers in the South West who tell me that finding the right people is getting harder – for a wide range of jobs and skills – particularly in construction, engineering, agriculture and the care sector.

In some cases, firms are responding by increasing wages. The MPC expects that wage increases will pick up in the coming years. Along with the fall back in inflation, these rising wages should support household spending.

We expect UK growth to be a bit slower this year than last, mainly due to the weakness in household spending.

But there are other factors that are helping UK growth, including a stronger outlook for exports. This stronger outlook comes from the recovery in world growth and the fall in the pound, which together should also encourage businesses to invest more. 

Even if the transition to Brexit is smooth, uncertainty about the eventual trading arrangements is likely to mean that firms will invest less than they otherwise would.

This is consistent with what my colleagues and I in the Bank’s agency network hear in our conversations with businesses. Many businesses remain uncertain about what Brexit means for them, which might discourage them from investing, perhaps because of fears that barriers to exporting might rise in the future.

So, investment is lower than might be expected given the current low cost of borrowing and the fact that some businesses are busy enough that they might benefit from buying new plant and equipment.

Overall, we expect growth to be modest over the next three years.

The Bank will continue to keep a close watch on the economy and it stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return to 2% inflation.

And we, the Bank’s agents in South West and our colleagues around the UK, will continue to play our part in that, acting as ‘the eyes and ears’ of the Bank. 

To keep up to date with what we are hearing from our contacts here in the South West and beyond by reading the reports on our website – www.bankofengland.co.uk/publications

The agents’ latest summary was published yesterday and is available here.

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