MNI EXCLUSIVE INTERVIEW: BOE Survey To Explore Brexit Impact

--Paul Mizen Talks To MNI About BOE Decision Maker Panel Survey 

--Survey To Track Corporate Brexit Uncertainty, Supply Hits

By David Robinson

     LONDON (MNI) - The Bank of England is rolling out an extensive survey of

chief financial officers in order to track the way the process of leaving the

European Union is fuelling uncertainty and impacting on costs, investment and

hiring decisions, as Governor Mark Carney and his colleagues are already

acknowledging its influence on their thinking.

     In an exclusive interview with Market News International, Paul Mizen, the

BOE consultant and Professor at the University of Nottingham, who is

spearheading the project, said that the initial findings showed businesses

expected sales and investment to be impacted by Brexit. Uncertainty is elevated

and the BOE Decision Maker Panel(DMP) survey aims to capture businesses'

changing perceptions as the Brexit saga unfolds.

     Mizen, speaking to MNI at the Money, Macro and Finance Research Group at

King's College, London said the DMP's large scale survey of finance officers

could be adjusted to get a fix on future Brexit developments, such as whether a

likely agreement on a Brexit transition period would lower uncertainty or would

be perceived as too little, too late.

     The survey asks respondents to set out what they believe are the best and

worst outcomes for their firms and three outcomes in between all with

probabilities allocated to them "so we can tell what is its most likely outcome

from its own perspective but also get some sense of the uncertainty around

this," Mizen said.

     "What firms are saying is that ... sales and investment are expected to be

lower, unit labour costs and financial costs are expected to be higher," he

said. 

     Exporters have contrasting views of the Brexit process, with those

expecting to benefit from it and those being handicapped by it broadly

cancelling each other out.

     "Some firms that are exporters are doing extremely well under the

depreciated exchange rate and others are not doing so well because they import

semi-manufactured goods and raw materials so there is no gain from the lower

exchange rate," he said.

     The DMP survey is being conducted monthly, with findings presented at each

BOE Monetary Policy Committee meeting. It will be published once a quarter

alongside the BOE Agents Reports.

     While elevated uncertainty typically depresses investment, Mizen warns that

the Brexit effect is not easy to isolate from other effects, because uncertainty

has been high since the global financial crisis hit back in 2008. 

     "It may well be that rather than uncertainty being high because of the

global financial crisis or because of Brexit there have been a succession of

shocks that kept that level of uncertainty elevated," Mizen said, adding that

they would try to disentangle the Brexit effect by looking at the types of firms

impacted.

     "If it is exporters that are most affected then we might very well say it

is connected to worry about future access to the European market that is the

cause of the uncertainty," he said.

     The DMP survey covers 2,500 firms, with the sample split into into three

waves with six common questions rotated through each wave over three months,

with an additional specific Brexit uncertainty question placed every six months.

     "Month-to-month the results don't change very much, so from six months to a

year you get much more evidence of shifting patterns. It is the right sort of

time-frame to compare over because over a six-month interval quite a number of

events related to the Brexit negotiation will have happened," Mizen said.

     The survey can be easily adjusted to reflect developments in the Brexit

outlook. The Treasury, the business ministry (BEIS) and the Department for

Exiting the EU are invited to put forward questions for inclusion in it to

enhance their understanding of the impact of Brexit and to inform negotiations

with the EU.

     "If proposals were put forward for a transition period then we could ask

firms an explicit question about the impact of those transitional arrangements,

possibly about whether it is going to be sufficient, whether it is going to be

long enough, what they think might happen after the end of the transition

period," Mizen said.

     BOE MPC member Gertjan Vlieghe said in a recent interview with the

Independent that if a transition period led to a strong sense that businesses

could forget about Brexit for a time and that they could just "get on with

business and not worry about it, that would be a very positive thing for

business and investment and would therefore influence our interest rate policy."

     As Vlieghe said, for policymakers "it doesn't matter what we think about

Brexit, it matters what everyone else thinks, and the extent to which it

influences their demand today. That's what we're trying to gauge."

     In giving its backing to the DMP the Bank is seeking to ensure it has the

depth and quality of data it requires to see just what businesses think about

Brexit and they survey is already informing the Bank's thinking.

     Asked at the August Inflation Report to justify his view that the Brexit

process was restricting supply Carney said "It's evident in our discussions

across the country with businesses, it's evident in our Decision Maker Panel

survey, it's evident in other business surveys."

     Mizen believes that the DMP is likely to show that perceptions of Brexit

will vary substantially sector-by sector.

     "If immigration were to be severely curtailed, for example, we might well

find that accommodation and food posts a much higher expected unit cost because

they tend to rely on low-skilled immigration," he said.

     Central banks getting involved in sophisticated business surveys reflecting

the impact of uncertainty on decision making is not new. Academic Nick Bloom, of

Stanford University, who is working alongside Mizen on the DMP, has set one up

for the Atlanta Fed.

     Mizen sees a case for the European Central Bank backing a mirror survey

into European businesses' views on Brexit.

     "Brexit is not just what happens to us it is going to have a cost to the

firms that are exporting to us and importing from us in the European Union. We

are only capturing the response of UK headquartered firms. It would be very

interesting to see what would happen in the Euro area if they were to set up a

survey of this kind," he said.

     A lot of care needs to go into interpreting answers as well. When CFOs were

surveyed about whether they would relocate from the UK, 75% said they would not

and the remainder gave positive probability that some of their activities would

shift overseas. The caveat is that a chunk of those with no relocation plans may

only be operating in the domestic market.

     What is not known, with the DMP only having a year's worth of data and with

all the key questions about how Brexit will turn out unanswered, is how good the

finance officers interviewed for the DMP will turn out to be at predicting its

impact.

     "What if the forecasts of firms are just bad? How do we control for that.

Well, to try to make sure that we can get some sense of how good their forecasts

are we posed them a question in March 2017 where we asked them to forecast real

GDP growth," Mizen said.

     "We gathered responses from the CFOs and we then compared their results to

results the Bank of England had collected two months earlier by professional

forecasters. And the distributions and average looked incredibly similar which

gave us a lot of confidence that, unless the CFOs were cribbing from the answers

that were given by the professional forecasters, they were actually quite good

at forecasting," he said.

     The latest quarterly version of the DMP is scheduled to be published

alongside the monthly BOE Agents report on September 20, but the MPC will have

had access to updated findings at this week's policy meeting.

     "We are only publishing them quarterly. For public consumption there is a

quarterly release, internally there is a monthly series," Mizen said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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