MNI INSIGHT: BOE To Review Uncertainty Hit As Brexit Crawls On

--BOE Set To Revisit Effect Of Uncertainty On Brexit Investment  

--Brexit Outlook Stays Cloudy Despite Transition Period Talks 

By David Robinson

     LONDON (MNI) - As part of its supply side "stock take" for the February

Inflation Report forecast round, the Bank of England will revisit the likely

impact of uncertainty on business investment and activity, MNI understands.

     For businesses, uncertainty looks set to remain elevated as the Brexit

process drags on. The assumption that uncertainty chills investment is

uncontroversial, but estimating the magnitude of the effect is exceptionally

tricky.

     There is little prospect of a quick fix to alleviate Brexit uncertainty.

The UK's drive to negotiate a transition deal to kick-in after it leaves the

European Union in March 2019 leaves the debate raging over what the likely end

state will be.

     The BOE monitors how Brexit is effecting business through its network of

agents and its Decision Maker Panel survey.

     "There are many issues that still need to be negotiated during that

transitional phase...So I think it will continue to feed the uncertainty. Until

everything is done firms will not know where they stand," Paul Mizen, the BOE

consultant who co-heads the DMP, told Market News.

     The BOE MPC over-estimated the likely near-term effect of uncertainty on

business and consumer activity in the wake of the June 2016 vote to leave the

EU, with growth holding up in the next two quarters before fading in 2017.

     Work by Bank economists Marko Melolinna and Srdan Tatomir, revealed in a

blog this month, moved away from looking at how uncertainty impacts swings in

output and instead looked at how it effects firms' investment.

     --INVESTMENT IMPACT

     Their data suggested that "uncertainty is a crucial factor in firms'

investment decisions," the authors stated.

     "An increase in uncertainty produces a relatively persistent effect on

investment ... This effect peaks after one year and then gradually dies out over

the next two years," they said.

     Even if uncertainty is an unreliable guide for forecasting near-term GDP

the MPC, which produces three year ahead forecasts, could well place weight on

it in making its business investment projections.

     A problem the firms face now is that while uncertainty generated by, say, a

financial shock can fade relatively quickly the uncertainty generated by the

Brexit debate just rolls on. 

     The spread of employers' views on where Brexit will end up, from the

process fizzling out into de facto remain through to hard Brexit, reflects the

spread of views among political insiders.

     A new survey of the views of politicians, however, pointed to political

infighting ahead over the terms of a transition deal, let alone the desired

shape of the final outcome.

     The Ipsos MORI survey covering 105 members of parliament, who gave their

views anonymously, found that while 85% supported the idea of a transition

period 74% of Conservative MPs believed it was unacceptable for freedom of

movement to continue during it.

     Replicating existing EU arrangements in the transition period should be

relatively straightforward but any attempts to start negotiating rule changes,

including by restricting freedom of movement, would complicate negotiations and

further fuel business uncertainty.

     --FEBRUARY REASSESSMENT

     In its February Inflation Report, the Bank will publish its latest

assessment of how the UK's supply side is faring.

     Labour supply has weakened, with net migration declining as the country's

pulling power has diminished due to a softer currency and doubts for immigrants

over future arrangements.

     MPC member Michael Saunders noted in his January 17 speech in London that

the overall UK workforce growth fell from 1.0% year-on-year growth in 2016 to

just 0.4% in late 2017, with employers facing widespread recruitment

difficulties.

     The work by Bank economists on uncertainty will help inform the Bank's

thinking on the investment outlook on the supply-side to accompany its work on

the labour supply side, with Brexit clouding the entire outlook.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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