The Bank of England has been sure-footed in its response to greater economic uncertainty following the EU referendum, but business needs a clear plan for the longer term
As expected, the Bank of England has cut interest rates for the first time since 2009 and introduced a whole package of other measures. It has rightly prioritised growth in its response to greater economic uncertainty after the EU referendum, and this should offer a shot in the arm for business and consumer confidence.
So now seems a good an opportunity to pause for breath, reflect on the state of the economy and question what happens next.
Weathering the early weeks since the vote is an important milestone. While we have seen a lot of financial market volatility, in general markets have continued to function well, and our members have said liquidity has been available when needed. Interbank market rates have barely moved, reflecting justified confidence in the banking system.
The capital requirements of our largest banks are now 10 times higher than before the crash, and the Bank of England has told markets it will make up to £250bn in liquidity available if needed. The Financial Policy Committee has relaxed rules around capital buffers to allow for more leeway in lending to businesses and households. And now the introduction of the Term Funding Scheme will make it easier for banks to pass on lower interest rates.
The business response
But what we are facing is a change in our trading relationship with the rest of Europe and potentially the rest of the world, which will have a fundamental impact on our economy over the long term. It’s too soon to provide a full assessment on the real economy, but our latest surveys show a weaker outlook for UK economic growth in the near-term.
Looking at individual sectors, a mixed picture emerges. In manufacturing, although investment intentions are softer as uncertainty weighs on corporate spending plans, the weaker pound is helping to boost export competitiveness.
Consumers have erred on the side of caution immediately following the referendum vote with weak retail sales, and there are expectations for slower growth ahead in other areas of the services sector too.
Business optimism, in particular, has fallen significantly.
But the CBI’s and other recent surveys are likely to have captured sentiment at a low point, since some data was collected just days after the referendum vote, before the new government was in place. And sentiment naturally tends to overreact to unexpected events.
A position of strength
Nevertheless, the Bank’s expectation that the UK’s growth potential could be negatively affected by Brexit in the medium term makes it all the more important for the government to take swift, decisive action to unlock investment and show that the UK is open for business.
We need to remember the UK is starting from a position of relative strength – with growth of 0.6 per cent last quarter. This is a solid base which we must build on.
So the government needs to focus on developing a clear plan and timetable for the negotiations to leave the EU. Many companies are already getting on with the job and continuing to invest, as we’ve seen from GlaxoSmithKline with its recent £275m commitment to expanding three manufacturing sites across the UK. But clarity on our continued access to the single market as soon as possible is of vital importance, so all businesses can continue to plan for the future.
Infrastructure must also feature as part of the government’s priorities, with a focus on connecting our regional cities, and the UK with the rest of the world. Giving the green light to expansion at City Airport – creating jobs and contributing to future economic activity – sends the right signal to investors. It now needs to be followed by a decision on airport capacity in the south east.
We need an immigration system that allows our businesses to access the talent and skills they need from around the world while addressing public concerns about pressures on our public services. Providing reassurances to EU migrants working in the UK is also vitally important to many business leaders. Equally, it is incumbent upon businesses to do more to train their own staff so they have the skills they need to succeed.
There’s also much we need to do to address how different regions are sharing in the UK’s prosperity. Outside of London and the south east, estimates of real output have not recovered to pre-crisis levels, with knock-on consequences for living standards. Much of the solution here will depend on raising productivity in every area of the UK. And our research suggests there are things the business community and policymakers can do to contribute.
Ultimately, the most significant effects of the vote will flow over the medium to long term, depending on the change in the UK's terms of trade, regulation and access to skills. As options for the future take shape, it will be more important than ever for the government to partner with business in navigating its approach.