Bank of England: EU uncertainty not hurting economy


February 2016

Bank of England: EU uncertainty not hurting economy

The deputy governor of the Bank of England has said that he has seen no evidence that the upcoming EU referendum has hurt any impending investment plans in the UK. He did say however that the Bank of England is continuing to monitor the situation very closely.

There have been many questions raised in recent times by people who are concerned that the continued uncertainty around Britain 's EU membership is damaging the level of investment that the UK has seen in recent times. However the deputy governor has said that he hasn 't seen any signs of this happening as of yet.

Mr Broadbent was asked about whether or not he felt that Britain 's membership of the EU was a major factor in companies ' decision to invest in the UK market or not. The referendum is thought to be likely to happen in June and it is looking increasingly likely that a Brexit from the European has become a very real possibility.

Mr Broadbent said on BBC Radio 5 Live:

"We have not yet seen, regarding investment intentions, any weakening of those of late, but obviously it 's something we watch pretty closely."

On Thursday the US investment bank, Goldman Sachs, issued a warning to the UK that choosing to leave the European Union could result in sterling plummeting in value. The said that they expected to see a fall of around 15-20%. If this were to happen, it would no doubt dissuade many foreign companies from investing in the British economy, which would in turn pile up the pressure on the current account deficit.

Sterling fell by around 0.4% against the dollar as of Friday. It now sits at around $1.4531.

Mr Broadbent was speaking against the backdrop of a recent YouGov poll that was carried out by the Times newspaper. The poll revealed that the "out" campaign now has a record lead in public opinion. This poll was carried out shortly after David Cameron revealed his first draft of a reform deal with the EU. The poll showed that around 45% of all voters now want to leave the EU, compared to only 36% who want to remain in the European Union. The remaining 19% of those surveyed are still undecided or would not vote in the upcoming referendum.

Allan Monks is an economist at JPMorgan Chase, he said that the timing of this poll was quite important because of the recent announcement of David Cameron 's draft deal. He said that "media write-ups of the draft deal were scathing".

He continued by saying that:

"Two major factors will be the extent to which fear of the unknown persuades the undecideds to remain, and issues surrounding migration will stoke support to leave. The latter is hard to predict and depends partly on how the refugee crisis is handled this year."

"But backing to remain from leading politicians and businesses could help to make up the minds of those currently undecided. Either way, at this stage the risk of a vote to leave appears real. And regardless of the ultimate effect this would have on the UK, we believe the transitional costs would be high."

Mr Broadbent 's comments on the impact of EU uncertainty echo comments that were recently made by the Prime Minister, David Cameron, and the chancellor, George Osborne.

Speaking at the World Economic Forum in Davos, David Cameron, said that getting the UK 's relationship with the EU right was the most important part of the negotiations and was vital to continue the economic recovery.

"There are more people in work in the British economy than ever before in our history and more women in work than ever before in our history. So we 've got some economic challenges that, of course, everyone is talking about here in Davos, but we 're going to continue to deliver the strong and resilient economy that we were elected to deliver."

"I want to be absolutely clear about the aim that I want us to achieve. I want to be clear about what needs to change in order to make that happen and I want to be clear about the debate that I think we need to have, including business and non-governmental organisations and others who care about this issue."

"So let me start with the aim. My aim is absolutely clear. I want to secure the future of Britain in a reformed European Union. I believe that is the best outcome for Britain and the best outcome for Europe. Now, some people ask me, ëWell, why are you holding a referendum? ' Let me explain why I believe this referendum is so crucial. For years Britain has been drifting away from the European Union. The European Union has become increasingly unpopular in Britain. And added to that, the succession of politicians, after treaty after treaty after treaty has passed, have promised referendums, but never actually delivered them. And I think it 's absolutely essential to have full and proper democratic support for what Britain 's place should be in Europe and that 's why we 're holding the referendum."

George Osborne echoed the Prime Minister 's thoughts in a recent interview and he went on to say that he did not believe that the UK was being damaged by the fact that its future within the EU is unclear.

He said:

"I don't think uncertainty about future EU membership is harming the UK economy, because the most recent numbers this week show we're creating jobs and employment is at a record high and we're getting a lot of investment. Do I think getting this relationship right for Britain, with the European Union, is important to our economic future? Yes I do, and what the Prime Minister was saying, and what we're saying as a government, is let's reform that relationship, let's allow the Eurozone to pursue, if they want, that ever greater political union. Britain doesn't want to be part of it, but within a reformed EU and with proper protections for countries like Britain that aren't in the Euro, we can have that European Union."

The Chancellor continued by responding to the fact that many market analysts had downgraded their current predictions for UK growth. He said that it was more important to look at what recognised bodies such as the International Monetary Fund were doing; the IMF has maintained their forecast for the UK.

"The IMF had their latest forecast this week, and they did downgrade the world economy, but they didn't downgrade the UK, and they kept the UK forecasts where they are, and along with the United States, we're set to be one of the fastest growing of the advanced economies, but clearly we're a big, open trading nation, we're probably the most open of all of the big G7 economies, and so you do look with some concern at what's going on in global markets, and it does present something of a dangerous cocktail out there."

Against the backdrop of a weakened level of GDP, many commentators have begun to wonder whether or not the UK is set to continue its recovery or whether it will falter from the continued turbulence of the world markets and an over-reliance on the services sector. One business leader wrote in the Guardian that George Osborne should now be hoping that interest rates are kept low in order to sustain what little growth the economy currently has.

"He needs the bank 's monetary policy committee, which sets interest rates, to recognise that the proper counterweight to weak growth forecasts is a further delay to the much-promised first rise in interest rates since the financial crash.In its quarterly inflation report, the MPC obliged. Most analysts put back a rise from 0.5% to later this year or 2017. One bank, Morgan Stanley, pencilled in September 2018."

"That gives mortgage-payers and the chancellor some breathing space. While interest rates remain low, consumers are likely to carry on spending, insulated to some extent from concerns about jittery global markets, currency wars and weak export numbers."

The main reason for this, the author suggests, is the fact that consumer spending must be maintained in order to keep the economic recovery on track.

A report from the IPPR thinktank said that the level of tax receipts is probably going to go down at some point again. It went on to say that it is unlikely Osborne will meet his spending targets:

"With the chancellor having already borrowed more by December 2015 than he had budgeted for the entire fiscal year, the Bank 's revised assessment of the economic outlook suggests that not even a self-assessment tax receipt bonanza in January will be enough to avoid a significant overshoot of the Office for Budget Responsibility 's forecast for government borrowing."

It is clear then that the times ahead remain somewhat murky. Broadbent, deputy governor of the Bank of England, continued to say that the recovery was still "solid" but that he believed there to be "no great urgency" to put up interest rates. He also said that the drop in oil prices was overall a "net good" for the economy. This drop in prices has come as a result of an excess of oil on the world markets and a lower level of demand; prices have fallen by around 75% since 2014.

Broadbent went on to say that wages (with inflation taken into account) have gone up by around 7% in the last 24 months; this marks the highest rate of growth for nearly 15 years.

"A lot of that has to do with the drop in oil prices. That 's boosted consumption and UK growth overall," he said.

"It was only in the latter part of 2012, once confidence about the eurozone had begun to come back, that the UK economy really got going. So, I would date the recovery not from 2008 or 2009, but actually from early 2013. And since then we 've enjoyed three years of pretty solid growth, certainly in the labour market."