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Bank of England cuts forecasts for UK growth as Brexit hits business investment

The Bank’s forecast for average earnings growth was also cut.


The Bank of England, today, announced that interest rates would remain at 0.25%. The Monetary Policy Committee (MPC) voted by 6-2 to leave interest rates at its all-time low. However, the Bank warned households to expect interest rates to rise over the next year whilst warning the cost of living would continue to rise from high inflation and weaker wage growth.

The Bank of England’s forecasts

The Bank also cut its forecast for GDP growth this year to 1.7%. This is down from the 1.9% it predicted in its last report. The growth forecast for 2018 was also cut to 1.6% whilst its forecast for 2019 remains unchanged at 1.8%.

And, worryingly for workers, the Bank cut its forecast for average earnings growth in 2018 to 3% from 3.5% and in 2019 to 3.25% from 3.75%. It predicted average earnings growth this year to remain at 2% so although workers should see faster wage growth over the next couple of years, it wouldn’t be as fast as they had previously predicted. When asked about why it had cut its forecasts for wage growth, Bank of England governor Mark Carney said Brexit uncertainty is a factor with businesses less willing to give bigger pay rises.

Businesses considering relocating or refocusing investment outside of UK

As well as hitting pay rises, Brexit is also hitting business investment. The Bank of England’s inflation report said “the anticipation of Brexit and related uncertainties are likely to dampen investment growth somewhat”. The report highlighted responses to a CBI survey on investment where two fifths of respondents said that Brexit had negatively affected their investment decisions. The Bank itself found businesses delaying investment plans because of uncertainty over future trading arrangements. It also reported that some had considered either relocating some of their operations to other countries or refocusing investment outside the UK.

Overall, the report said “investment is projected to grow less strongly than would have been expected given the strength in global and financial conditions”.

The Bank’s assessment is supported by PMI data published this week. The PMI reports for both the services sector and construction sector highlighted Brexit uncertainty as leading to businesses and consumers being more reluctant to spend. And although there was better news for the manufacturing sector, boosted by a strong export performance, the PMI report said “the rate pf expansion eased to its lowest since March”.

You can see more from the Bank of England’s inflation report at bankofengland.co.uk.

Transition deal with no single market & customs union access will damage economic growth

In questions after the report was published, the governor was asked whether economic growth will be damaged from a transition deal that didn’t include single market and customs union access. Carney said “relative to current arrangements, in the medium-term any agreement that… reduces access to aspects of our largest trading partner is likely to reduce the level of economic activity in this country”. He added that other factors such as what other trade agreements the UK agrees as well as what measures are taken will also impact economic growth. But taken in isolation, reduced trade with the EU would likely lead to reduced economic growth.

Talk of a transition deal in the UK has increased more recently and agreeing one seems to have broad support amongst government ministers. However, there still seems to be disagreement over the shape it would take – particularly with regard to free movement. In a bid to clarify the situation, a spokesperson for the prime minister insisted that free movement would end when the UK leaves the EU. However, the government has been unable to say what would replace it. Instead, the government said EU citizens would continue to be welcome but that they would need to register with the relevant authority. As we reported in a previous article, however, what the future status and rights of those EU citizens arriving post-Brexit will matter to the transitional deal the EU is willing to agree.

No 10 confirms free movement will end but don’t know what happens next

If businesses are hesitant about investing in the UK as a result of Brexit uncertainty, the government doesn’t appear to be in a rush to provide reassurance.


Image: © Claudio Divizia / Shutterstock.com
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