BoE Agent’s survey underlines growth risks from Brexit - ING

James Knightley, Senior Economist at ING, notes that the Bank of England’s Agent Summary survey suggests capex and hiring plans will be scaled back and turnover is expected to weaken, leading to a weaker growth outlook for the UK economy.

Key Quotes

“The Bank of England’s Agent Summary survey for August gives us a bit more information on how businesses have reacted to the Brexit vote. The general assessment is that there has been a slight softening in consumer spending and business services turnover, manufacturing wasn’t doing too badly, but construction was struggling. Meanwhile, hiring intentions had been scaled back “with contacts now expecting flat employment over the next six months”. This survey therefore adds some weight to the view that the immediate sharp drop in the purchasing managers’ indices may have been a slight over-reaction. Nonetheless, there are clear risks to the economic growth story.

Indeed, the BoE asked direct questions on the expected impact on businesses from Brexit. A net 34.5% of respondents said they would reduce capital spending (0 firms said they would increase capex, while 40% said it would have no effect, 51% said they would slightly reduce capex and 9% said they would substantially reduce capex – note that when calculating the net balance the BoE give half weight to “slightly” and full weight to responses of “substantially” therefore 34.5=0.5*51+9). Hiring activity had a net balance of -29%, Turnover had a net balance of -25% and expectations for prices had a net balance of +12%.

So with British businesses suggesting that they are pulling back on expansion plans the survey is consistent with the general consensus expectation amongst economists that the UK will experience a mild recession over the next 6-12 months.

We therefore expect Bank Rate to be cut again in November to 0.1% with QE eventually upped to half a trillion pounds despite the BoE’s problems in purchasing bonds yesterday. We then expect Chancellor Phillip Hammond to carry through with his suggestion resetting fiscal policy at the Autumn Budget Statement, likely implementing an acceleration in infrastructure investment financed by borrowing to try and improve the productive potential of the UK economy.”