Britain’s biggest businesses are warning the economy will remain in the slow lane, as uncertainty from Brexit puts their investment plans on ice despite progress with Brussels.
The interjection by British Chambers of Commerce comes before a meeting ofBank of England’s rate-setting committee this week. The BCC have told ministers they now need to finalise a transitional deal to smooth the Brexit process before firms will increase spending on staff and production capacity, despite the breakthrough last week that moved talks with the rest of the EU on to trade.
The lobby group said tepid investment levels, weak wage growth and high inflation would lead Threadneedle Street to keep interest rates on hold until the final months of 2019, far later than most expectations. The BCC downgraded its growth outlook for this year from 1.6% to 1.5%, while forecasting a slowdown to 1.1% from 1.2% in 2018.
The Bank’s monetary policy committee is meeting for the first time since raising the cost of borrowing in November – the first rise in interest rates in a decade. The MPC is expected to keep rates on hold at 0.5% on Thursday, although economists will be looking for any clues for when the next rise will come at a time of slowing economic growth.
Adam Marshall, BCC director general, said: “Despite last week’s deal, Brexit uncertainty still lingers over business communities, and is undermining many firms’ investment decisions and confidence.
“Despite pockets of resilience and success, and strong results for some UK firms, the bigger picture is one of slow economic growth amid uncertain trading conditions.”
Business investment in technology and in training for employees is key for driving up economic output as well as productivity, which has been sluggish since the financial crisis – a major cause of low rates of wage growth for UK workers. The government has launched an industrial strategy as well as more funding for skills and research at the budget last month in response.
The MPC decision, due at midday on Thursday, will follow fresh inflation, jobs and wages figures on Tuesday and Wednesday, which are expected to confirm that the squeeze on British households’ spending power is yet to dissipate. The weak pound since the Brexit vote last year is still pushing up the cost of imported goods, while wages are failing to grow above the rate of inflation, despite the lowest levels of unemployment since the mid-1970s.
The consumer price index measure of inflation stood at 3% in October, confounding an expectation for prices to rise further. City economists reckon the CPI will hold steady in November when the figures are released on Tuesday, helping the Bank’s governor, Mark Carney, to avoid writing a letter to the chancellor – which he must do when CPI is more than a percentage point above or below Threadneedle Street’s 2% target.
Analysts at Goldman Sachs say progress in the Brexit talks last week is unlikely to encourage the Bank to move any faster towards higher interest rates, given that the MPC’s economic outlook assumes a transitional period. The investment bank reckons there will be three rate rises by mid-2020, with the next one towards the end of next year.
Some economists expect the MPC will next vote for a rate increase as early as May, while others see the next rise coming later in the year. The Bank has a balancing act to strike between keeping inflation in check to protect consumers from the rising cost of living, and also providing enough stimulus to encourage economic growth.
The central bank’s actions will come in a week when the European Central Bankis also expected to keep interest rates on hold for the eurozone and the Federal Reserve is expected to raise the cost of borrowing as the economy of the US powers ahead at twice the pace of the UK’s. The Fed rate is expected to raise from 1.25% to 1.5%, while the ECB is expected to keep its main rate at 0%.