Minutes:
Ms Lai Wah Co, Deputy Agent for Greater London, Bank of England gave a presentation providing an overview of the UK and London economy in terms of recent trends and possible future threats and opportunities for the region.
A copy of the presentation can be found in Appendix 1 attached to the minutes. The areas covered included key economic indicators, prospects for UK GDP growth as forecast in November 2016, and inflation and uncertainty for the UK relating to Brexit.
The attached graph, highlighting economic survey measures of activity, employment and new business, showed that there was not much difference between the London and UK variants. All measures had slowed in the summer of 2016, but had bounced back sharply in the second half of the year. It was felt that this had been largely due to some transactions in the economy not being committed to, both in the run up to and immediately after the EU referendum, including house buying and financial services.
Following the outcome of the Brexit Referendum there had been shock, nervousness and panic which caused survey measures of activity and confidence to plummet. These had contributed to the Bank of England’s gloomy economic forecast in August, and its loosening of monetary policy at that time (a cut in the official interest rate, further quantitative easing and a new lending scheme) to reduce the risk of a mild recession.
The ILO unemployment rate showed that London’s unemployment rate was at a historic low of 5.5%. The UK level was also at its lowest since 2005, against comparable data since 1992.
Although UK CPI inflation had been below the Government’s 2.0% target over the last couple of years, the recent rise had been driven by goods inflation.
The UK’s exchange rate had started to depreciate over a year ago and that had accelerated following the Brexit Referendum. Sterling had fallen nearly 20% against the US dollar and by around 10% against the Euro since the vote. This had already started to feed through to inflation and it was anticipated that more prices would start to reflect that it was more expensive to import goods. It was noted, however, that the sterling depreciation would also make the UK more competitive as exports would become cheaper.
Forecasts were uncertain, but it was expected that growth would slow sharply over the next year or so. It was also expected that CPI inflation would rise sharply over the coming year, to just under 3%. There was a marked slowing in the growth of the London and UK economies expected this year, of around just under a percentage point, in part as business investment was likely to be more restrained. It was noted that more was likely to be known about the shape of the UK’s future potential trading arrangements and how they might affect economic growth once Article 50 was invoked by the end of March 2017.
A discussion took place regarding confidence in the UK’s ability to negotiate successful terms in the Brexit process. Ms Co said that the Bank of England had a vested interest in anything that would affect financial services, given its responsibility for financial stability, and they would recommend that the Government puts transitional arrangements in place to ensure the process is as smooth as possible. It was noted that the uncertainty of what was to come had left many companies in limbo, which was the most damaging aspect of the Brexit Referendum, and not the outcome of the vote itself.