State of the Birmingham economy - the Bank's view

By Glynn Jones, from the Bank of England

UK temperatures reached record highs last month, but the UK economy has not been heating up this summer.  Instead - as world trade tensions and worries about a no-deal Brexit have risen - the economy has been slowing down.

On 1 August, the Bank of England’s Monetary Policy Committee (MPC) kept Bank Rate at 0.75% and lowered its forecasts for UK growth this year and next.

You have probably seen news of trade tensions between the US and China. If major economies like these bring in further tariffs or taxes on goods and services bought from other nations, this could further slow global growth. We have already seen businesses in major foreign economies investing less because trade tensions have made them less certain about future demand for their products.  As foreign economies slow, so does foreign demand for UK products.  Meanwhile, domestically, Brexit uncertainty is also having a negative effect on business investment in the UK. 

And with significant volatility in output, Agents are increasingly being asked to gauge the extent to which Brexit is distorting headline indicators to get a truer read on economic activity. For example, increased stockpiling and shutdowns have prompted large swings in some economic indicators. Part of the Agents role is to look through this ‘noise’ to assess the true pattern of underlying growth.  

Hence I’ve been asking my business contacts here in Birmingham about these issues. Across the UK, around three in every ten of our contacts are now even more uncertain than they were ahead of the extension of Article 50. Only one in ten is more certain.  We reckon that investment this year has been as weak as it’s been in almost a decade, and this is acting as a major drag on economic growth.

This is despite solid household spending, supported by the fastest pay growth since 2008 and the lowest level of unemployment since the mid-1970s. The robust performance of the labour market contrasting quite sharply with the more subdued picture of demand and output growth.

Looking ahead, the path the UK economy takes over the next few years will by very sensitive to the terms of our departure from the EU.  If there is a no-deal Brexit, then UK economic growth would probably slow further.   Even though three quarters of the business contacts we have asked say they are “as ready as they can be” for no-deal scenarios, they still think investment and demand for their products would fall in the first year of a no-deal Brexit.

The increased risk of a no-deal Brexit has already caused the pound to fall to its lowest level in two years against other major currencies in recent weeks. In no-deal scenarios, inflation could be pushed up by tariffs on imports and further falls in the pound. But lower investment and slower growth could push prices down. The MPC would have to judge how best to act given the balance of these effects.

On the other hand, if there is a deal that allows the UK to move smoothly to a new trading relationship with the EU, then business investment would probably rise, causing growth to accelerate.  If there is a Brexit deal, the MPC’s judgement is that gradual and limited increases in Bank Rate would be appropriate to keep inflation from being above the 2% target in a few years’ time. Bank Rate is likely to remain substantially lower than before the financial crisis.

The challenges posed by Brexit do not end there, with the Bank also responsible for ensuring financial stability. Our latest review of the largest UK banks and insurers shows that they are strong enough to handle the risk of a very bumpy Brexit, and are much stronger than a decade ago after the financial crisis. The reason behind this is that we have made the banks hold a lot more capital – or their ability to withstand losses. This means that the UK financial system is ready for Brexit, whatever form it takes.

In short, no matter what sort of Brexit there is, the Bank will always act to promote the good of the people by keeping inflation on target - while supporting jobs and growth – and addressing risks to financial stability both in the near and long term.  I am pleased to say that the Banks Agents – with the support of businesses here in Birmingham and throughout the UK - continue to remain central to the achievement of both of these core objectives.

* Glynn Jones is the Bank of England Deputy Agent for the West Midlands. The BoE has nearly 30 agents across 12 regions, who gather information to feedback to Policy Committees based in Threadneedle Street. An individual agent can visit hundreds of local businesses and other groups a year, with meetings with a broad range of businesses from farming to financial services.