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In a room above Newcastle’s Live Theatre, an engineer, a farmer and a manufacturer of fitted kitchens are discussing the future of the UK economy — or at least their small parts of it. Around the same table, an accountant and a recruiter are comparing notes on the outlook for their businesses, while a pair of property consultants assess the local market.
This disparate group has been meeting on and off for years, convened by Mauricio Armellini, the Bank of England’s garrulous agent for the north-east region as part of his intelligence-gathering operations. The Boe’s Uk-wide network of agents exists to give policymakers a window into local communities. Agents hold face-to-face meetings with hundreds of companies, of all sizes and from all sectors, reporting back their findings to inform monetary and financial stability policy decisions.
For London-based policymakers trying to track economic conditions across the UK, the agents’ work has become even more valuable in the past year. Brexit has distorted businesses’ behaviour, with stockpiling, factory shutdowns and swings in sentiment making economic data unusually volatile and difficult to decipher. Contacts on the ground have helped gauge the impact on the economy of prolonged uncertainty but also the robustness of businesses and households in the event of a shock.
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“In the year I’ve been on the [Boe’s] Monetary Policy Committee, the economy has got softer and softer,” says Jonathan Haskel, a professor at London’s Imperial College, and external MPC member, who was part of the discussion in Newcastle.
Throughout that year, the BOE has left interest rates on hold at near-record lows, essentially waiting to see how Brexit would play out. But when the MPC next meets, on November 7, the case for action may be growing clearer.
Until recently, the MPC has argued that rates will eventually need to rise to contain inflation and offset chronically weak productivity growth. If the government succeeds in driving through its Brexit deal, then some on the MPC say a rebound in business investment could put interest rate rises back on the agenda. That was the gist of comments made by Dave Ramsden, the Boe’s deputy governor, and Gertjan Vlieghe, an external MPC member, earlier this month.
If the UK leaves without a deal — which remains a possibility — the MPC has warned that rate cuts to limit the economic shock would not be automatic, as a likely fall in sterling, and its inflationary effect, would limit their room for manoeuvre. But Mr Vlieghe and Michael Saunders, another external MPC member, have suggested that even if a chaotic Brexit is avoided, rate cuts may be needed, because of the uncertainty now damaging the economy against a darkening global backdrop.
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“A scenario of entrenched Brexit uncertainty is likely to keep economic growth below potential, and require some monetary stimulus,” Mr Vlieghe says. “We will probably know in the coming weeks which of these scenarios will prevail”.
Once a home of heavy industry, from shipbuilding to engineering and mining, the north-east of England has suffered more than most regions from post-industrial decline. Now, Newcastle — which voted to remain in the EU, although the region as a whole opted to leave — has a thriving university, cultural institutions and a more resilient servicebased economy. But other parts of the region remain reliant on a handful of industrial employers.
The north-east would be worse affected in the long term than any other region, according to the government’s own modelling, if the UK were to leave the EU without a deal — or indeed even if Boris Johnson’s current plan were to pass — leading to an economic relationship with the EU based on a bare-bones free trade agreement.
This is a consequence of the area being more reliant on goods exports, especially in sectors such as carmaking — Nissan recently said it would review production of a new SUV model in Sunderland, 11 miles south-east of Newcastle, if there was a no-deal Brexit. The damage would be particularly painful for a region where average incomes, employment and productivity still lag well behind the UK average.
Yet at least half the executives gathered around the table say business is thriving, for now. “Most of our clients are doing well . . . they are busy, business is good, they’ll take on labour,” says Andrew Moorby, managing partner at the accountancy firm MHA Tait Walker. He adds that his office has handled just one insolvency in the past two years. “It’s not doom and gloom — the world hasn’t stopped for Brexit.”
Ian Dormer, managing director of Rosh Engineering, admits that his business repairing high-voltage equipment is less sensitive to the economic cycle: contracts with regulated electricity companies and large industrial customers are usually long term. But he, too, was struggling to keep up with orders. “I’m turning work away because I can’t get skilled labour,” he says.
Their reports of healthy order books are at odds with the gloomy tone of some recent business surveys, but consistent with national trends in the latest official data.
Figures from the Office for National Statistics show gross domestic product recovered from the second quarter’s contraction to grow 0.3 per cent in the three months to August — feeble by historical standards, but probably enough for the UK to escape a technical recession. A fall in manufacturing output was offset by a recovery in the services sector that drives the UK economy.
And while business investment has been falling, consumers have so far been willing to keep spending — helped by near-record employment, and a recent pick-up in real wage growth. “The economy has not crashed,” Mr Saunders said recently. “The effect of Brexit uncertainties is perhaps akin to the economy developing a slow puncture such that growth has slowed to a mere crawl.”
