MNI INTERVIEW: BOE Advisor Notes Rising CFO Brexit Uncertainty

--Paul Mizen Points To Hiring Problems Pushing Up Labour Costs

By David Robinson

     LONDON (MNI) - The Bank of England's Decision Maker Panel (DMP) survey,

which covers 2,500 CFOs, found rising uncertainty about the impact of Brexit on

sales and investment, alongside the belief that costs would increase, one of the

survey's authors told Market News.

     The survey, published this week, found that Chief Finance Officers see cost

pressures mounting as the Brexit process unfolds, underscoring Governor Mark

Carney's warning in a speech this week that its net effect was likely to be

inflationary.

     "The survey is indicating very clearly that firms expect unit labour costs

and financing costs to increase. There is also evidence out there that firms are

facing greater labour shortages which may be pushing their wage bill up," Paul

Mizen, a BOE consultant and economics professor at Nottingham University, said.

     The DMP survey, which came out alongside the third quarter BOE Agents

Report, found that firms were experiencing very elevated recruitment

difficulties, with skill shortages particularly severe in areas including

construction, IT and healthcare.

     "There is evidence out there that firms are facing greater labour shortages

which may be pushing their wage bill up .. Our survey is showing that there is

now an anticipation of increasing costs and this will eventually feed through to

prices," Mizen said. 

     Many firms will have been able to insulate themselves so far from some of

the effects of the Brexit-related fall in sterling and other upward cost

pressures, but these will eventually be felt.

     "Some supply contracts will be in place from before Brexit and would have

been negotiated at fixed prices. When those contracts expire you might expect

that the new prices will be higher than the old ones and that would lead to

further pressure on the firms' cost base and an increase in prices," Mizen said.

     In his speech at the IMF on Sept 18, Carney highlighted upward prices

pressure from Brexit.

     The Governor cited "the inflationary effects of the exchange rate, imported

inflation due to higher tariffs and a steeper Phillips (unemployment/inflation)

curve from supply chain and labour market impacts," which may be offset to some

extent by weaker EU demand for UK goods.

     The DMP survey, however, found that firms on the whole placed a high

probability on maintaining investment over the next 12 months, but with a 25%

chance that Brexit could have a negative impact on it and seeing only a very

slim chance of a Brexit boost.

     "There is obviously some pipeline effect here. Firms will have initiated

some investment before the Brexit vote and it is very expensive to stop

investment mid-stream," Mizen said.

     Brexit could hit future investment, with the survey's negative skew on the

investment intentions question reflecting this.

     The DMP survey now has more than a years' worth of data since the Brexit

vote to try and gauge shifting perceptions of the referendum vote's likely

impact.

     The Q3 survey showed a further decrease in the number of firms saying that

Brexit was not important, suggesting the reality of its potentially disruptive

effects was striking home. At the same time, uncertainty about its effects also

appear to have increased.

     "When you look at the distributions of, for example, sales growth or

investment growth over the next few years, comparing those to a year ago they

seem slightly more dispersed, that suggests slightly more uncertainty," Mizen

said.

     On Friday Prime Minister Theresa May is set to deliver a speech in

Florence, providing an update on Brexit. There has been media speculation that

she could make clear that the UK is prepared to continue to pay for access to

the EU single market during a transition process.

     Mizen said that the impact of a growing likelihood of a transition period

may well show up in the DMP's regular questions on expected sales and investment

growth but could also be the subject of a future special question.

     The survey found the vast majority of firms were not planning to relocate

existing business abroad as a result of Brexit, but those that do plan to move

are not waiting for the final outcome of the Brexit process.

     "Firms employing about 7% of the workforce indicated that they are going to

move some of their business abroad and the majority of those have decided that

that will happen in the next two years. So it does seem like something that has

already been decided," Mizen said.

     The DMP survey compiles responses from firm's with UK headquarters. One

thing it does not capture is the risk of disinvestment in the UK by firms

headquartered elsewhere in the EU, with a recent UBS survey of euro area

corporates finding 43% expect to cut UK capacity due to Brexit. The European

Central Bank is not currently producing a mirror image DMP survey to capture

Brexit effects on corporates on the other side of the channel.

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

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

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