Lingering Brexit Uncertainty Set to Weigh on U.K. Investment

Updated on
  • Economy shows resilience to EU vote in the near term
  • BOE, EU offer gloomy assessment of business spending in 2017

Brexit Process Turning Into a Debacle: Mark Gilbert

The Bank of England and the European Commission offered a gloomy outlook for U.K. business spending over the next year, warning that Brexit uncertainty will restrain investment by companies.

The BOE said investment may stagnate at best over the coming year, citing a report from its network of U.K. representatives, while the European Union body said it could “decline sharply” throughout 2017. It forecast a 2.2 percent drop, citing the fallout from Britain’s June vote to leave the bloc.

“Business sentiment had recovered further from its post-referendum fall, but remained relatively fragile alongside significant uncertainty around the longer-term outlook,” the BOE said on Wednesday.

While the short-term impact of the Brexit vote has proved limited, the lack of clarity on the U.K.’s new trading relationship with the EU will slowly filter through, according to the commission. It sees economic growth cooling to 1 percent from 1.9 percent this year.

“Uncertainty is likely to remain high as negotiations on the future relationship between the U.K. and EU continue, impeding the extent of the rise in growth in 2018,” it said.

The commission’s analysis was published alongside forecasts for all of the European Union. It said risks have risen in recent months and are “clearly tilted to the downside,” partly because of the Brexit vote. Euro-area expansion will average 1.5 percent in 2017, below the 1.8 percent forecast in May.

The BOE noted that sterling’s 17 percent drop since the referendum has helped manufacturing exports, a view echoed in monthly industry surveys. Separate data on Wednesday showed that trade is on course to contribute to U.K. economic growth for the first time this year, with the deficit in goods and services narrowing in the third quarter.

The British Chambers of Commerce on Wednesday downplayed the impact of the currency, saying it can’t be a complete solution to the trade gap.

“While the decline in the value of the pound is likely to provide some impetus to U.K. exporters, the lack of responsiveness of U.K. exports to other sterling devaluations in recent years suggests it is unlikely to provide a quick fix to the weak net trade position,” said Suren Thiru, head of economics at the BCC.

The BOE’s latest overview of the economy comes a week after it kept its key interest rate at 0.25 percent and maintained its current package of stimulus measures. The BOE also raised its forecasts for growth and inflation, and signaled a growing concern about the pace of price growth.

The agents’ report said consumer demand had recovered further and that the pound was playing a part; spending on luxury items rose thanks to tourists taking advantage of the weaker currency.

Nevertheless, the flip side from the depreciation is that import costs have also increased, which is filtering through to higher prices for consumers. The BOE said factory output-price inflation had turned positive and will probably pick up further as foreign currency hedges and fixed-price contracts expire.

— With assistance by Andrew Atkinson, and Jill Ward

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