MNI INTERVIEW-2: UK Investment To Lag Even With EU Deal: Bean

By David Robinson

     LONDON (MNI) - UK business investment will continue to be sapped by

uncertainty even if parliament approves an agreement for withdrawal from the

European Union, as details of the nation's new trading arrangements will only

emerge over time and politics could remain volatile, a top official at the

Office for Budget Responsibility and former deputy governor of the Bank of

England told MNI.

     An initial withdrawal agreement with the EU, leading to a transition period

before final departure from the bloc, would "cut out some of the worst downside

tail possibilities" but, while investment should pick up as the final shape of

the trade deal emerges, it would be easy to exaggerate the benefits, Charles

Bean said in an interview.

     "Businesses that are involved in international trade at that stage, they

won't be quite sure if they want to pay for operations and all sorts of things.

So they will still be holding off," he said.

     A shift to new trading arrangements would involve downsizing some

industries and expanding others, as a result of import substitution and shifts

between sectors.

     "You might have a period where gross investment looks quite strong but the

net additions to the country's capital stock, and therefore the effect on

potential output, might be rather less than that," Bean said.

     Business investment contracted in every quarter of 2018, markedly weaker

than the OBR had forecast in 2016 after the vote to leave the EU and

contributing about half a percentage point to its cumulative GDP forecast error.

     Business investment will contract by 1.0% in 2019 before growing at 2.3 to

2.4% a year after that - still relatively modest, according to the OBR's updated

economic and fiscal projections on Wednesday.

     Speaking in a week of high political drama as parliament rejected Prime

Minister Theresa May's proposed EU deal, Bean also noted that UK politics had

become more fraught in general.

     "Even independently of the Brexit process you could say there is an

unusually high degree of political uncertainty because of the polarisation of

politics. Previously, we had two main parties which were close together

competing for the middle ground. Now you have got parties which are more

affected by the extremes on both sides," he said.

     --MOVING AWAY FROM RPI

     Bean also referred to deliberations over moving away from the flawed Retail

Price Index measure, which is used for inflation-linked government bonds, or

gilts.

     On Wednesday, the Treasury said the government was considering a report by

the House of Lords Economic Affairs Committee, which said the UK Statistics

Authority was at risk of breaching its statutory duty by not correcting known

errors in RPI, and would respond in April.

     MNI understands the government is likely at some point to opt to switch

fresh linker issuance to a more reliable index, such as CPI or the CPIH measure

incorporating housing costs, and that it would opt to leave outstanding

inflation-linked bonds on RPI, rather than try to improve RPI to iron out its

more egregious defects.

     Bean warned that changing the RPI formula would trigger costly redemption

clauses on gilts linked to the index

     "It is not just that the state has financial contracts which are indexed to

RPI, like indexed gilts, but there are also the private sector contracts as

well. So, there needs to be a conscious decision to co-ordinate moving off RPI

on to CPI," Bean said.

     "The state can certainly start by saying 'we now want to do CPI indexed

bonds rather than RPI indexed bonds.'"

     If Chancellor of the Exchequer Philip Hammond sanctioned any reform of RPI

a BOE expert committee, formerly under Bean's chairmanship and now under his

successor Ben Broadbent, would advise on whether the reform amounted to a

fundamental and material change to the data warranting redemptions.

     Knowing that formula change would leave the door open to gilt redemptions

"may effect whether the Chancellor deems it appropriate," Bean said.

     Bean said he thought the Lords report was too "trying to put too much

pressure" on the Office for National Statistics", which has already stated that

RPI was not a reliable statistic, as it recorded prices that went up and

returned to where they started as an increase in the price level.

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

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