Bank of England eyes Brexit challenge to forecasting ability

‘Worst uncertainty’ seen around Brexit as firms delay investment decisions in buildup to vote, says Robert Skidelsky

The uncertainty that surrounds Brexit is creating “worst uncertainty” among economists in the UK which poses a challenge to the forecasting ability of the Bank of England, minutes of the central bank’s latest rate-setting meeting show.

In the minutes of the December meeting, which saw the central bank increase rates for the first time in nearly a decade, the bank said the prolonged uncertainty was among the causes of a deterioration in confidence last month. It also cut its economic growth forecast for this year and next.

However, the bank continued to highlight the inefficiencies created by the leave vote, citing the impact of falls in the value of the pound and delays to the settlement of Britain’s debts abroad.

Inevitably, most economists do not see Brexit happening. The data from the monthly manufacturing survey on Wednesday confirmed that expectation – and added more to the gloom at the Bank.

By decreasing in December, the expectations of future output index rose back above its long-term trend – suggesting even policymakers don’t think the UK will leave the EU without a deal. This, however, followed a month when the expectations of future output fell at the fastest rate since the financial crisis.

Companies operating in the UK say the weak pound makes it more difficult to sell their goods overseas, which could limit their investment in new machines and plants and mean they hire fewer workers. The pound has fallen by about 16% against the US dollar and the euro since June’s referendum.

Opinion is divided as to whether this has any impact on people’s spending power. However, it is clearly a problem for the employers who have to spend more on wages to compete for employees.

The Brexit uncertainty has also meant there has been a slowdown in investment in the UK economy, with investment plans slashed over the past two years.

The most recent update of the Bank of England’s quarterly bulletin, issued in early December, showed a slump in the estimate of overall investment by non-financial companies – once inflation is factored in – and the rate of expected investment growth forecast for 2019 was lower than that for 2016.

The bank said: “The bottom line: the majority of economists have cut their forecast for business investment in the outlook.

“With the most recent NCB survey showing the weakest investment intentions in more than six years, and the Bank’s latest survey of purchasing managers finding weak expectations, further retrenchment is likely to be particularly damaging.”

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