20th July 2016
The Bank of England’s agents have found that many firms are taking a business as usual approach to the economy but they are planning strategic reviews in the wake of the referendum.
The survey, in which the Bank’s agents talk to businesses across the country, found that the annual rate of activity growth had remained moderate and little changed in the month up to the EU referendum.
Consumer spending and construction output growth had eased a little, offset by a pickup in manufacturing growth from a low base and there had been further signs of uncertainty leading to delays in decision-taking, including on capital spending, hiring and property investment.
It found that following the EU referendum, business uncertainty had risen markedly. Many firms had only just begun to formulate new business strategies in response to the vote and, for the time being, were seeking to maintain ‘business as usual’.
A majority of firms spoken with did not expect a near-term impact from the result on their investment or staff hiring plans. But around a third of contacts thought there would be some negative impact on those plans over the next twelve months. As yet, there was no clear evidence of a sharp general slowing in activity.
The Bank says the Agents have increased the intensity of their intelligence gathering following the EU referendum — in particular by speaking with contacts at larger companies — to understand how businesses are responding, or plan to respond, to the result. This box summarises the intelligence gathered so far.
Many contacts planned to undertake strategic reviews of their operations over the coming months in light of the vote. For many, the result of the referendum was a shock; few had contingency plans and so for the time being were in a mode of seeking to maintain ‘business as usual’.
Uncertainty had risen and many felt there was a lack of information on which to base major decisions and that information might only become available with a considerable lag as future trading relations became clearer. As yet, there were few suggestions of disinvestment, such as exiting the United Kingdom in the near term, but there were a few reports of planned foreign direct inward investment being postponed.
A number of companies were considering alternative European locations for aspects of their business, and some contacts within large international firms expected their continental European operations to receive a greater share of future investment than their UK ones. But some contacts mentioned the possibility of moving production back to the United Kingdom, or increasing the domestic sourcing of products, in light of sterling’s fall.
The outlook for investment was uncertain. The majority of firms spoken with did not expect a near-term impact from the referendum result on their capital spending. But around one third expected some negative effects over the next twelve months, with reports of a ‘risk off’ approach to expenditures and some imminent plans for spending slipping.
Business services contacts reported reductions overall in corporate deal-making activity, as some planned mergers and acquisitions and corporate finance activity had been paused or cancelled. CRE investment activity had already fallen ahead of the referendum and there were further reports of a reduction in investor demand.
Housebuilding companies had become more cautious in their approach to land acquisition. More generally for construction firms, there were expectations that output growth would slow over the coming year as companies became more cautious about initiating projects.
There had been little evidence of any impact on consumer spending on services and non-durable goods, although there were some reports of consumers becoming more hesitant around purchases of higher-value goods. However, consumer confidence and spending were thought to be vulnerable to a weakening of disposable incomes as the fall in sterling was passed onto higher consumer prices and to any increase in unemployment or correction to housing values. There were reports of a dip in housing market sentiment in the days immediately following the referendum, but transactions had so far been more resilient than some contacts had expected.
As yet, there had been few reports of major alterations to businesses’ employment intentions. But the vote to leave was expected to have a negative effect overall on hiring activity over the coming twelve months. Fewer contacts made any reference to the vote affecting pay decisions. Some contacts’ pension deficits were likely to have increased as the discounted value of liabilities had risen, potentially raising future pension costs. In terms of the supply of labour, there was substantial concern about potential reductions in the availability of Eastern European labour among companies whose staffing was heavily reliant on those employees.
The referendum result was expected to have a positive effect on export turnoverover the coming year, particularly for manufacturers, as the depreciation of sterling boosted export earnings. Companies’ prices were likely to increase, as the fall in sterling passed through to higher import costs. Farmers had begun to see agricultural commodity prices rise, affecting both costs and prices. Manufacturing and some construction input costs were expected to rise over an extended period, lasting beyond a year.
The cost of retail goods was expected to increase over a year or more, with fresh food costs beginning to rise within the next three months. Non-food costs could take somewhat longer to pick up however, as forward contracts expire. Given intense competition, retailers reported seeking to minimise increases in consumer prices, with a view to protecting their market share. But in some services, such as catering, there were expectations that prices could rise relatively quickly.
Credit conditions were thought to have tightened slightly in financial markets. But the early evidence indicated that banks’ appetite to lend had been maintained following the referendum decision. There were reports that demand for credit was easing alongside lower expectations for investment spending.