Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 6 Box 2 Chart B High LTV mortgage rates have fallen recently, Recent developments in new mortgage rates despite reference rates having picked up Average quoted rates on two-year mortgages and two-year oIS rate(a) Over the period since the financial crisis, the average interest rate on new mortgages has fallen markedly reaching a low of ust under 2% in October 2017. Since then, Bank Rate has risen (Two-year 90% LIV by 50 basis points but the average rate on new mortgages has increased by less(Chart A). As a result, the difference between Iwo-year 75% LT new mortgage rates and risk-free rates -the mortgage spread has fallen further Chart A The average interest rate on new mortgages has risen Two-year ois(b)\'- by less than Bank Rate recently Bank Rate and household effective interest rates (a) The Bank's quoted rate series are weighted monthly average rates advertised by all UK Per cen (b)Monthly averages of two year ahead sterling overnight index swap (oIs)rates. a anks and deposits, relative to wholesale funding. Indeed, the value banks' deposits now exceeds that of their loans, and supervisory intelligence indicates that banks take into account deposit rates when pricing loans Given those developments, the stability of deposit rates over the past few years( Chart A)may help explain the stability of mortgage rates. Prior to 2008, sight deposit rates were some (a) The Bank's effective rate series are weighted averages of rates from a sample of banks and way below Bank Rate. When Bank Rate was cut to very low levels during the financial crisis, deposit rates fell by less and the spread between them became positive. Retail banks' desir One factor that is likely to have weighed on new mortgage to return this spread towards more normal levels may help Bank Rate, is competition in the mortgage market. Discussions not risen one-for-one with Bank Rate recently e rates, have rates, potentially offsetting the upward impetus from explain why deposit rates, and therefore mortgag with lenders suggest that competition has been intense for some time. Since the start of 2018 this is most apparent in the In the MPC's projection, mortgage rates are expected to pick high loan to value(LTV) segment of the mortgage market: the up gradually over the forecast period partly because spreads average quoted rate on two- year fixed 95% LTV mortgages on new mortgage lending over risk-free rates widen a little. has fallen by around 80 basis points despite reference rates There is uncertainty around that judgement, however, as it will having picked up slightly(Chart B) depend on how factors such as competitive pressures and deposit rates evolve. The MPC will continue to monitor the Competition in the mortgage market may have been amplified dynamics in the mortgage market, as well as its implications by the ring-fencing of major UK banks which separates retail for the monetary transmission mechanism more broadly banking services from other activities. (1) As some ring-fenced entities have more domestic deposits than loans, and are subject to restrictions on the type of banking activity they can undertake, they may be incentivised to increase mortgage Lending rates will also be affected by developments in banks funding costs. While the cost of bank funding raised in wholesale markets has fluctuated substantially in recent months, those movements have not been transmitted to mortgage rates. As discussed in Box 1 of the February Report, the importance of wholesale unsecured funding spreads in loan pricing is likely to have fallen as the large retail banks increased their share of deposit funding, particularly sight (2)See Saunders, M(2019), " Pass-through of Bank Rate to household interest rates
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 6 Box 2 Recent developments in new mortgage rates Over the period since the financial crisis, the average interest rate on new mortgages has fallen markedly reaching a low of just under 2% in October 2017. Since then, Bank Rate has risen by 50 basis points but the average rate on new mortgages has increased by less (Chart A). As a result, the difference between new mortgage rates and risk-free rates — the mortgage spread — has fallen further. One factor that is likely to have weighed on new mortgage rates, potentially offsetting the upward impetus from Bank Rate, is competition in the mortgage market. Discussions with lenders suggest that competition has been intense for some time. Since the start of 2018 this is most apparent in the high loan to value (LTV) segment of the mortgage market: the average quoted rate on two-year fixed 95% LTV mortgages has fallen by around 80 basis points despite reference rates having picked up slightly (Chart B). Competition in the mortgage market may have been amplified by the ring-fencing of major UK banks which separates retail banking services from other activities.(1) As some ring-fenced entities have more domestic deposits than loans, and are subject to restrictions on the type of banking activity they can undertake, they may be incentivised to increase mortgage lending. Lending rates will also be affected by developments in banks’ funding costs. While the cost of bank funding raised in wholesale markets has fluctuated substantially in recent months, those movements have not been transmitted to mortgage rates. As discussed in Box 1 of the February Report, the importance of wholesale unsecured funding spreads in loan pricing is likely to have fallen as the large retail banks increased their share of deposit funding, particularly sight deposits, relative to wholesale funding. Indeed, the value of banks’ deposits now exceeds that of their loans, and supervisory intelligence indicates that banks take into account deposit rates when pricing loans. Given those developments, the stability of deposit rates over the past few years (Chart A) may help explain the stability of mortgage rates. Prior to 2008, sight deposit rates were some way below Bank Rate. When Bank Rate was cut to very low levels during the financial crisis, deposit rates fell by less and the spread between them became positive. Retail banks’ desire to return this spread towards more normal levels may help explain why deposit rates, and therefore mortgage rates, have not risen one-for-one with Bank Rate recently.(2) In the MPC’s projection, mortgage rates are expected to pick up gradually over the forecast period partly because spreads on new mortgage lending over risk-free rates widen a little. There is uncertainty around that judgement, however, as it will depend on how factors such as competitive pressures and deposit rates evolve. The MPC will continue to monitor the dynamics in the mortgage market, as well as its implications for the monetary transmission mechanism more broadly. (1) For more information see Britton, K, Dawkes, L, Debbage, S and Idris, T (2016), ‘Ring-fencing: what is it and how will it affect banks and their customers?’, Bank of England Quarterly Bulletin, 2016 Q4. (2) See Saunders, M (2019), ‘Pass-through of Bank Rate to household interest rates’. 0 1 2 3 4 5 6 7 2005 08 11 14 17 Per cent Bank Rate(b) Rate on sight deposits(a) Rate on new mortgages(a) Chart A The average interest rate on new mortgages has risen by less than Bank Rate recently Bank Rate and household effective interest rates (a) The Bank’s effective rate series are weighted averages of rates from a sample of banks and building societies with products meeting the specific criteria. Not seasonally adjusted. (b) End-month rate. 0 1 2 3 4 5 6 7 8 2008 10 12 14 16 18 Per cent Two-year 95% LTV Two-year 90% LTV Two-year OIS(b) Two-year 75% LTV Chart B High LTV mortgage rates have fallen recently, despite reference rates having picked up Average quoted rates on two-year mortgages and two-year OIS rate(a) (a) The Bank’s quoted rate series are weighted monthly average rates advertised by all UK banks and building societies with products meeting the specific criteria. Not seasonally adjusted. (b) Monthly averages of two year ahead sterling overnight index swap (OIS) rates
Inflation Report May 2019 Section 2 Demand and output 7 2 Demand and output GDP growth appears to have been stronger than expected in Q1, but is expected to be subdued in the near term Brexit-related uncertainty has led to a reduction in business investment and an increase in stockbuilding. In comparison, household spending has been relatively resilient, although the housing market has remained subdued A weaker global economy has dragged on export growth Chart 2.1 GDP growth is expected to be stronger than projected 2.1 Near-term outlook in2019Q1 GDP growth and Bank staffs near-term projection(a) Based on ONS data to February, quarterly GDP growth is expected to have picked up to 0.5% in 2019 Q1, from 0. 2% in 2018 Q4, stronger than projected in the February Report (Chart 2.1). Part of this pickup was driven by a recovery in manufacturing output(Chart 2. 2), and may reflect a boost from companies building up stocks ahead of a potential no-deal Brexit. It is also possible that stockbuilding has boosted output in some parts of the services sector(Box 3) Growth in Q1 also appears to have been lifted by erratic monthly movements in output: GDP fell by 0. 3% in December before rising by 0. 5% and 0. 2% in January and February respectively asure GDP i Business surveys have weakened markedly since the side of start of the year(Chart 2. 3), and point to weaker growth in 2019 Q1 than the official data. As discussed in Box 3 of the amond Jubilee. Including those erratic factors, the RMSE for 2019 Q1 rises to 02 percentage February Report, the relationship between survey responses and gDP growth may be weaker at times of high uncertainty This may be, in part, because surveys are sensitive to changes in sentiment But there are also reasons to be cautious in interpreting the official GDP data, which can move sharply Chart 2. 2 Manufacturing output picked up in early 2019 Contributions to three-month on three-month output growth by sectoral from quarter to quarter and are often revised over time Percentage points Uncertainty around near-term projections is larger thar normal at present and growth outturns could be volatile. In Output growth(per cent) the MPC's central projection, the boost from stockbuilding is expected to be temporary, and quarterly growth is expected to Manufacturing.6 slow to 0. 2% in 2019 Q2 Smoothing through recent developments, the underlying pace of GDP growth appears to have been slightly stronger than anticipated in February, but Services(80%) nonetheless marginally below potential GDP growth is Other production expected to remain a little below potential rates in the second half of 2019 plume measures at basic prices. Figures in parentheses are weights in nominal GVA in On the expenditure side, the balance of growth is expected to ion and agriculture. remain broadly unchanged in 2019(Table 2. A). As in 2018
Inflation Report May 2019 Section 2 Demand and output 7 2 Demand and output • GDP growth appears to have been stronger than expected in Q1, but is expected to be subdued in the near term. • Brexit-related uncertainty has led to a reduction in business investment and an increase in stockbuilding. In comparison, household spending has been relatively resilient, although the housing market has remained subdued. • A weaker global economy has dragged on export growth. 2.1 Near-term outlook Based on ONS data to February, quarterly GDP growth is expected to have picked up to 0.5% in 2019 Q1, from 0.2% in 2018 Q4, stronger than projected in the February Report (Chart 2.1). Part of this pickup was driven by a recovery in manufacturing output (Chart 2.2), and may reflect a boost from companies building up stocks ahead of a potential no-deal Brexit. It is also possible that stockbuilding has boosted output in some parts of the services sector (Box 3). Growth in Q1 also appears to have been lifted by erratic monthly movements in output: GDP fell by 0.3% in December before rising by 0.5% and 0.2% in January and February respectively. Business surveys have weakened markedly since the start of the year (Chart 2.3), and point to weaker growth in 2019 Q1 than the official data. As discussed in Box 3 of the February Report, the relationship between survey responses and GDP growth may be weaker at times of high uncertainty. This may be, in part, because surveys are sensitive to changes in sentiment. But there are also reasons to be cautious in interpreting the official GDP data, which can move sharply from quarter to quarter and are often revised over time. Uncertainty around near-term projections is larger than normal at present and growth outturns could be volatile. In the MPC’s central projection, the boost from stockbuilding is expected to be temporary, and quarterly growth is expected to slow to 0.2% in 2019 Q2. Smoothing through recent developments, the underlying pace of GDP growth appears to have been slightly stronger than anticipated in February, but nonetheless marginally below potential. GDP growth is expected to remain a little below potential rates in the second half of 2019. On the expenditure side, the balance of growth is expected to remain broadly unchanged in 2019 (Table 2.A). As in 2018, 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 2013 14 15 16 17 18 19 Percentage change on a quarter earlier Projection in February Projection GDP + – Chart 2.1 GDP growth is expected to be stronger than projected in 2019 Q1 GDP growth and Bank staff’s near-term projection(a) Sources: ONS and Bank calculations. (a) Chained-volume measure. GDP is at market prices. The blue diamonds show Bank staff’s projection for the first estimate of GDP growth in 2019 Q1 and Q2. The bands on either side of the diamonds show uncertainty around those projections based on the out-of-sample performance of Bank staff’s best-performing model since 2004, representing ±1 root mean squared error (RMSE). The RMSE of 0.1 percentage points around the 2019 Q1 projection excludes three quarters affected by known erratic factors: the 2010 snow and the 2012 Olympics and Diamond Jubilee. Including those erratic factors, the RMSE for 2019 Q1 rises to 0.2 percentage points. For 2019 Q2, the RMSE of 0.3 percentage points is based on the full evaluation window. 0.4 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 July Jan. July Jan. Percentage points Construction (6%) Services (80%) Manufacturing (10%) Other production (4%)(b) Output growth (per cent) 2017 18 19 + – Chart 2.2 Manufacturing output picked up in early 2019 Contributions to three-month on three-month output growth by sector(a) (a) Chained-volume measures at basic prices. Figures in parentheses are weights in nominal GVA in 2016. Contributions may not sum to the total due to rounding. (b) Other production includes utilities, extraction and agriculture
Inflation Report May 2019 Section 2 Demand and output 8 Chart 2.3 Survey indicators of expected output growth are well consumption is expected to be the main driver of growth, below their historical averages underpinned by continued real income growth, while business Survey indicators of expected output growth investment is expected to fall further as Brexit-related uncertainty continues to encourage firms to delay spending The contribution from net trade picks up as world GDP growth stabilises, however. Government consumption is expected to contribute positively, partly reflecting the fiscal loosening announced in Budget 2018. The latest projections are conditioned on the tax and spending plans set out in the March 2019 Spring Statement, which contained little news for GDP 2.2 Demand and the impact of Sources BCC, CB,时H Brexit-related uncertainties to increase aver the next year, weighted together using output shares Data are Underlying demand growth appears to have slowed since to incease over the next year. Differences from average since January 2 mid-2018. This seems to have been driven largely by two (c) Net percentage balance of respondents from the manufacturing, distribution, consumer, b factors: a slowing in the world economy(Section 1)and an increase in Brexit-related uncertainties According to the latest increased over the month(manufacturing) weighted together using output shares. Differences from averages since January 2000. Deloitte CFO Survey, 54%of CFOs rate the level of uncertainty as high or very high, compared to just 25% in 2018 Q2.That Table 2. A Monitoring the MPC's key judgements has weighed on business investment. Household spending and nents anticipated in February Developments now anticipated during real income growth have been relatively resilient, and stronger during 2019 Q1-2019 Q3 2019Q2-2019Q4 than projected a year ago (Box 6), but there is some evidence that Brexit-related uncertainty has weighed on the housing Quarterly real post-tax household Quarterly real post-tax household income growth to average 14%. income growth to average just over y%. market( Box 4) artery consumption growth to Quarterly consumption growth to be Corporates Business investment fell by 0.9% in Q4 (Table 2.B), th Mortgage approvals for house purchase Mortgage approvals for house purcha fourth consecutive quarter of decline. As noted in the to average around 65,000 per month average just over 60,000 per month The UK house price index to increase by The UK house price index to fall by just February Report, business investment has been weak since the around 14% per quarter, on average. over 134% in the year to 2019 Q4 eferendum but that weakness has intensified since the Housing investment to fall by y2% per .Housing investment to fall by y% per middle of last year By asset, the recent slowdown in business investment has Business investment to fall by y% per Business investment to fall by y% per been relatively broad-based(Chart 2. 4). Investment in ICT and arter, on average Trade machinery and intellectual property have fallen back The contribution of net trade to Investment in transport has remained very weak, driven by a quarterly GDP growth to be close to contribution to quarterly GDP growth. fall in investment by airlines. The ONS suggests that this could zero, on average. reflect a structural shift in the way in which airlines acquire aircraft. In recent years, large UK airlines have increased the Chart 2. 4 The slowdown in business investment growth has been relatively broad-based number of aircraft that they acquire through operating leases, Contributions to four-quarter growth in business investment by assetla) rather than outright purchases. ()Under this type of acquisition, the leasing company retains the economic Percentage points ICT and mach ownership, and as many of these companies are based in the US and Ireland, most of this investment will not show up in the UK National accounts Many of the determinants of business investment have remained supportive. The cost of finance is low relative to historical norms, rates of return on capital are robust, the Labour market remains tight and survey measures suggest that Business investment growth(per cent] firms are operating with limited spare capacity( Section 3) 2013 All of this should increase firms' incentive to invest Sources oNS and Bank calculations. (1)Business investment in the UK: analysis by asset ONS
Inflation Report May 2019 Section 2 Demand and output 8 consumption is expected to be the main driver of growth, underpinned by continued real income growth, while business investment is expected to fall further as Brexit-related uncertainty continues to encourage firms to delay spending. The contribution from net trade picks up as world GDP growth stabilises, however. Government consumption is expected to contribute positively, partly reflecting the fiscal loosening announced in Budget 2018. The latest projections are conditioned on the tax and spending plans set out in the March 2019 Spring Statement, which contained little news for GDP. 2.2 Demand and the impact of Brexit-related uncertainties Underlying demand growth appears to have slowed since mid-2018. This seems to have been driven largely by two factors: a slowing in the world economy (Section 1) and an increase in Brexit-related uncertainties. According to the latest Deloitte CFO Survey, 54% of CFOs rate the level of uncertainty as high or very high, compared to just 25% in 2018 Q2. That has weighed on business investment. Household spending and real income growth have been relatively resilient, and stronger than projected a year ago (Box 6), but there is some evidence that Brexit-related uncertainty has weighed on the housing market (Box 4). Corporates Business investment fell by 0.9% in Q4 (Table 2.B), the fourth consecutive quarter of decline. As noted in the February Report, business investment has been weak since the referendum, but that weakness has intensified since the middle of last year. By asset, the recent slowdown in business investment has been relatively broad-based (Chart 2.4). Investment in ICT and machinery and intellectual property have fallen back. Investment in transport has remained very weak, driven by a fall in investment by airlines. The ONS suggests that this could reflect a structural shift in the way in which airlines acquire aircraft. In recent years, large UK airlines have increased the number of aircraft that they acquire through operating leases, rather than outright purchases.(1) Under this type of acquisition, the leasing company retains the economic ownership, and as many of these companies are based in the US and Ireland, most of this investment will not show up in the UK National Accounts. Many of the determinants of business investment have remained supportive. The cost of finance is low relative to historical norms, rates of return on capital are robust, the labour market remains tight and survey measures suggest that firms are operating with limited spare capacity (Section 3). All of this should increase firms’ incentive to invest. (1) ‘Business investment in the UK: analysis by asset’, ONS. Developments anticipated in February during 2019 Q1–2019 Q3 Developments now anticipated during 2019 Q2–2019 Q4 Consumer spending Revised up slightly • Quarterly real post-tax household income growth to average ¼%. • Quarterly consumption growth to average ¼%. • Quarterly real post-tax household income growth to average just over ¼%. • Quarterly consumption growth to be between ¼% and ½%. Housing market Revised down • Mortgage approvals for house purchase to average around 65,000 per month. • The UK house price index to increase by around ¼% per quarter, on average. • Housing investment to fall by ½% per quarter, on average. • Mortgage approvals for house purchase to average just over 60,000 per month. • The UK house price index to fall by just over 1¼% in the year to 2019 Q4. • Housing investment to fall by ½% per quarter, on average. Business investment Broadly unchanged • Business investment to fall by ½% per quarter, on average. • Business investment to fall by ¼% per quarter, on average. Trade Revised up slightly • The contribution of net trade to quarterly GDP growth to be close to zero, on average. • Net trade to provide a small positive contribution to quarterly GDP growth. Table 2.A Monitoring the MPC’s key judgements 3 2 1 0 1 2 2012 13 14 15 16 17 18 19 BCC(a) Differences from averages (number of standard deviations) IHS Markit/CIPS(d) CBI(c) Lloyds(b) + – Chart 2.3 Survey indicators of expected output growth are well below their historical averages Survey indicators of expected output growth Sources: BCC, CBI, IHS Markit, Lloyds Banking Group and Bank calculations. (a) Net percentage balance of respondents in the non-services and services sectors reporting they expect turnover to increase over the next year, weighted together using output shares. Data are not seasonally adjusted. Differences from average since January 2000. (b) Net percentage balance of respondents with turnover over £1 million that expect business activity to increase over the next year. Differences from average since January 2002. (c) Net percentage balance of respondents from the manufacturing, distribution, consumer, business and professional services sectors reporting that they expect output to increase in the next three months weighted together using output shares. Differences from average since October 2003. (d) Net percentage balance of respondents expecting business activity to rise over the next year (service and construction) or reporting that new orders have increased over the month (manufacturing), weighted together using output shares. Differences from averages since January 2000. 6 4 2 0 2 4 6 8 10 12 2013 14 15 16 17 18 Percentage points Transport Intellectual property Building and structures ICT and machinery Business investment growth (per cent) + – Chart 2.4 The slowdown in business investment growth has been relatively broad-based Contributions to four-quarter growth in business investment by asset(a) Sources: ONS and Bank calculations. (a) Chained-volume measure
Inflation Report May 2019 Section 2 Demand and output 9 Table 2. B Expenditure components of demand(a) The weakness of business investment despite these supportive factors suggests that Brexit-related uncertainties have had an Percentage changes on a quarter earlier pact. Indeed, evidence from the Decision Maker Panel Quarterly averages 98-2008- 2013-2016H2 (DMP) Survey suggests that impact has increased over the 2007091216H1 past year. Investment by firms that viewed Brexit as an Household consumption(b) 0.8 0.5 0.1 0.6 osos 03 0.3 important source of uncertainty fell at the end of 2018, Private sector investment 0.7 -4.5 2.0 0.9 1.0 -0.1 -0.2-0.8 compared to a rise in investment among those firms that did not( Chart 2.5). Conditioned on a range of model 073.42.2040.5-05-0.6-0.9 specifications and other factors, the latest DMP Survey data housing investment 0.6-7.0 1.4 2.4 2.2 0.9 0.7-0.7 suggested that the level of nominal investment may be between 6%-14% lower than it would have been in the 08-1.10.50.8 06040.20. absence of Breit uncertainties and investment(e)mption 09080.20.400-0.6081.1 Final domestic demand 0.8 0.3 0.7 0.5 0.2 0.4 0.3 Surveys suggest that investment will remain weak in the near Change in inventories(a)(e)0.0 0. 1 0.0 -0.1 0.3 0.4 -0.2 term For example, the Agents'scores for investment Alignment adjustment) 0.o.1 0o 0.0 0.0 0o 0.0 0.6 intentions in both the manufacturing and services sectors have Domestic demand() 0.8-0.7040.70.40.50.60.3 'Economic'exports(e) fallen to their lowest level in nearly nine years 1.1131.00.8111.1081.6 Economic'importsla 1.1081.108-010721 Net tradele)(2) 0.1000.1-0.10.1-0.30.0-0 How firms'investment intentions develop over the near term will be influenced by the time frame over which they expect Real GDP at market prices 0.7 -0.7 020.70.2 Memo nominal GDP af Brexit uncertainty to be resolved. If, for example, businesses market prices 12-0.2 0.90.9 1.0 0.7 1.1 0.7 judge that uncertainty is likely to fade quickly, then they may reduce capital expenditure sharply as they wait for a resolution (a) chained-volume measures unless oth to emerge. In contrast, a more protracted period of from the public corporation sector to uncertainty may lead to a less abrupt change in expenditure if companies judge it too costly to wait for any resolution to ()Excluding the impact of missing trader intra-community(MmC)fraud. become apparent. Indeed, tentative evidence from the DMP Survey suggested that firms which expect Brexit uncertainty to be resolved in the next year have reported Chart 2.5 The DMP Survey suggests that Brexit uncertainty has lower investment growth over the recent past than those who deterred business investmen expect a resolution after 2019 verage annual growth in capital expenditure a)by degree of Firms' capital expenditure plans will also depend on their expectations about the nature of the UK's future relationship Less impor with the EU, and a resolution of uncertainty may not in itself lead to a recovery in investment. For example, if firms expect a much less open trading relationship with the EU, they may scale down investment and the size of their UK operations Households three concerns While consumer confidence about the general economic situation has fallen since mid-2018, quarterly consumption Q1 Q2 Q3 Q4 growth has been steady, averaging 0.3%. This resilience is expected to continue in the near term, and consumption is Sources DMP Survey and Bank calculations. expected to grow by 0. 4% in 2019 Q1 m firms reported expenditure in the previous quarter and that in the same quarter a year ag 0) Question: How much has the result od the EU referendum affected the level of uncertainty One possible reason for the resilience of consumption growth affecting is that individuals confidence about their personal financial situation has remained much stronger than that about the general economic situation, despite declining somewhat in recent months(Chart 2.6). That relative strength could reflect perceptions of high job security as the unemployment rate has remained low. Developments in households'savings-and therefore consumption relative to income-tend to broadly mirror movements in unemployment( Chart 2.7)
Inflation Report May 2019 Section 2 Demand and output 9 The weakness of business investment despite these supportive factors suggests that Brexit-related uncertainties have had an impact. Indeed, evidence from the Decision Maker Panel (DMP) Survey suggests that impact has increased over the past year. Investment by firms that viewed Brexit as an important source of uncertainty fell at the end of 2018, compared to a rise in investment among those firms that did not (Chart 2.5). Conditioned on a range of model specifications and other factors, the latest DMP Survey data suggested that the level of nominal investment may be between 6%–14% lower than it would have been in the absence of Brexit uncertainties. Surveys suggest that investment will remain weak in the near term. For example, the Agents’ scores for investment intentions in both the manufacturing and services sectors have fallen to their lowest level in nearly nine years. How firms’ investment intentions develop over the near term will be influenced by the time frame over which they expect Brexit uncertainty to be resolved. If, for example, businesses judge that uncertainty is likely to fade quickly, then they may reduce capital expenditure sharply as they wait for a resolution to emerge. In contrast, a more protracted period of uncertainty may lead to a less abrupt change in expenditure if companies judge it too costly to wait for any resolution to become apparent. Indeed, tentative evidence from the DMP Survey suggested that firms which expect Brexit uncertainty to be resolved in the next year have reported lower investment growth over the recent past than those who expect a resolution after 2019. Firms’ capital expenditure plans will also depend on their expectations about the nature of the UK’s future relationship with the EU, and a resolution of uncertainty may not in itself lead to a recovery in investment. For example, if firms expect a much less open trading relationship with the EU, they may scale down investment and the size of their UK operations. Households While consumer confidence about the general economic situation has fallen since mid-2018, quarterly consumption growth has been steady, averaging 0.3%. This resilience is expected to continue in the near term, and consumption is expected to grow by 0.4% in 2019 Q1. One possible reason for the resilience of consumption growth is that individuals’ confidence about their personal financial situation has remained much stronger than that about the general economic situation, despite declining somewhat in recent months (Chart 2.6). That relative strength could reflect perceptions of high job security as the unemployment rate has remained low. Developments in households’ savings — and therefore consumption relative to income — tend to broadly mirror movements in unemployment (Chart 2.7). Table 2.B Expenditure components of demand(a) Percentage changes on a quarter earlier Quarterly averages 1998– 2008– 2010– 2013– 2016 H2 2018 2018 2018 2007 09 12 16 H1 –17 H1 Q3 Q4 Household consumption(b) 0.8 -0.5 0.1 0.6 0.5 0.5 0.3 0.3 Private sector investment 0.7 -4.5 2.0 0.9 1.0 -0.1 -0.2 -0.8 of which, business investment(c) 0.7 -3.4 2.2 0.4 0.5 -0.5 -0.6 -0.9 of which, private sector housing investment 0.6 -7.0 1.4 2.4 2.2 0.9 0.7 -0.7 Private sector final domestic demand 0.8 -1.1 0.5 0.8 0.6 0.4 0.2 0.1 Government consumption and investment(c) 0.9 0.8 -0.2 0.4 0.0 -0.6 0.8 1.1 Final domestic demand 0.8 -0.6 0.3 0.7 0.5 0.2 0.4 0.3 Change in inventories(d)(e) 0.0 0.0 0.1 0.0 -0.1 0.3 0.4 -0.2 Alignment adjustment(e) 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.6 Domestic demand(f) 0.8 -0.7 0.4 0.7 0.4 0.5 0.6 0.3 ‘Economic’ exports(g) 1.1 -1.3 1.0 0.8 1.1 -1.1 0.8 1.6 ‘Economic’ imports(g) 1.4 -1.1 0.8 1.1 0.8 -0.1 0.7 2.1 Net trade(e)(g) -0.1 0.0 0.1 -0.1 0.1 -0.3 0.0 -0.2 Real GDP at market prices 0.7 -0.7 0.4 0.6 0.5 0.2 0.7 0.2 Memo: nominal GDP at market prices 1.2 -0.2 0.9 0.9 1.0 0.7 1.1 0.7 (a) Chained-volume measures unless otherwise stated. (b) Includes non-profit institutions serving households (NPISH). (c) Investment data take account of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2. (d) Excludes the alignment adjustment. (e) Percentage point contributions to quarterly growth of real GDP. (f) Includes acquisitions less disposals of valuables. (g) Excluding the impact of missing trader intra-community (MTIC) fraud. 8 6 4 2 0 2 4 6 8 10 Q1 2017 Q2 Q3 Q4 Q1 18 Q2 Q3 Q4 Q1 19 Per cent Among top three concerns Less important + – Chart 2.5 The DMP Survey suggests that Brexit uncertainty has deterred business investment Average annual growth in capital expenditure(a) by degree of concern about Brexit(b) Sources: DMP Survey and Bank calculations. (a) Two-quarter moving average. Quarterly annual growth rates are estimated from firms’ reported level of capital expenditure in the previous quarter and that in the same quarter a year ago. (b) Question: ‘How much has the result of the EU referendum affected the level of uncertainty affecting your business?’
Inflation Report May 2019 Section 2 Demand and output 10 Chart 2.6 Households'confidence about their personal financial Consumption growth has been underpinned by real income situation has fallen by less than that about the general economy growth. That is expected to continue over 2019, with Indicators of consumer confidence consumption growth expected to remain close to current rates (number of standage since 199 and the saving ratio to remain broadly flat. One risk to that projection is that the recent deterioration in households Unemployment sentiment about their personal financial situation, and the General economic slight pickup in their unemployment expectations, continues Uncertainty might be expected to have a more significant effect on larger and more permanent purchases, such as housing and durable goods, than it does on everyday spending Personal financ The housing market has been weak since the referendum and there is evidence to suggest that Brexit-related uncertainties have weighed on house prices, alongside other factors Sources GiK (research camied out on behalf of the European Commission) and Bank calculations (a) Net balances of respondents expecting that the number of people unemployed will rise over the ()Net balance of respondents reporting that they expect their personal fit o the Growth in spending on durable goods decreased a little in the second half of 2018, quarterly growth averaged 0.9% compared to 1.3% in the first half of the year. A fall in car purchases accounts for a significant proportion of this decline Chart 2.7 The low level of the saving ratio may be linked to the As noted in the February Report, this largely reflected supply low unemployment rate issues related to a change in emissions regulations. The latest The saving ratio and the unemployment rate car registrations data suggest that spending on cars recovered in2019Q1 Net trade and the current account Net trade reduced quarterly GDP growth by 0. 2 percentage points in 2018 Q4, and that drag is expected to have increased in 2019 Q1. As noted in Box 3, imports of goods from the EU have increased since the start of the year, probably reflecting stockbuilding by UK firms. Monthly data suggest that good exports to non-EU countries fell sharply in the three months to February, likely reflecting weak global demand. That was Includes NPISH partly offset by exports of goods to the EU picking up, as EU firms also appear to have stockpiled Chart 2. 8 The current account deficit widened to 4. 4% in The current account deficit -which reflects the balance of 2018Q4 nominal trade flows and other payments between the UK and current account the rest of the world- widened to 4.4% of gDP in 2018 Q4 Percentages of nominal GD (Chart 2. 8). Since 2016, the UK has relied on substantial foreign capital inflows to fund the current account deficit. This poses risks to the UK economy. For example, a reduction in foreign investor appetite could lead to falls in UK asset price and a tightening in domestic credit conditions. As discussed in the November 2018 Financial Stability Report, there is mixed evidence about investor appetite for UK assets since the EU referendum Current account balance
Inflation Report May 2019 Section 2 Demand and output 10 Consumption growth has been underpinned by real income growth. That is expected to continue over 2019, with consumption growth expected to remain close to current rates and the saving ratio to remain broadly flat. One risk to that projection is that the recent deterioration in households’ sentiment about their personal financial situation, and the slight pickup in their unemployment expectations, continues. Uncertainty might be expected to have a more significant effect on larger and more permanent purchases, such as housing and durable goods, than it does on everyday spending. The housing market has been weak since the referendum and there is evidence to suggest that Brexit-related uncertainties have weighed on house prices, alongside other factors (Box 4). Growth in spending on durable goods decreased a little in the second half of 2018, quarterly growth averaged 0.9% compared to 1.3% in the first half of the year. A fall in car purchases accounts for a significant proportion of this decline. As noted in the February Report, this largely reflected supply issues related to a change in emissions regulations. The latest car registrations data suggest that spending on cars recovered in 2019 Q1. Net trade and the current account Net trade reduced quarterly GDP growth by 0.2 percentage points in 2018 Q4, and that drag is expected to have increased in 2019 Q1. As noted in Box 3, imports of goods from the EU have increased since the start of the year, probably reflecting stockbuilding by UK firms. Monthly data suggest that goods exports to non-EU countries fell sharply in the three months to February, likely reflecting weak global demand. That was partly offset by exports of goods to the EU picking up, as EU firms also appear to have stockpiled. The current account deficit — which reflects the balance of nominal trade flows and other payments between the UK and the rest of the world — widened to 4.4% of GDP in 2018 Q4 (Chart 2.8). Since 2016, the UK has relied on substantial foreign capital inflows to fund the current account deficit. This poses risks to the UK economy. For example, a reduction in foreign investor appetite could lead to falls in UK asset prices and a tightening in domestic credit conditions. As discussed in the November 2018 Financial Stability Report, there is mixed evidence about investor appetite for UK assets since the EU referendum. 4 3 2 1 0 1 2 3 2010 13 16 19 Differences from averages since 1997 (number of standard deviations) Unemployment expectations (inverted) General economic (a) situation expectations(b) Personal financial situation expectations(b) + – Chart 2.6 Households’ confidence about their personal financial situation has fallen by less than that about the general economy Indicators of consumer confidence Sources: GfK (research carried out on behalf of the European Commission) and Bank calculations. (a) Net balances of respondents expecting that the number of people unemployed will rise over the next 12 months. (b) Net balance of respondents reporting that they expect their personal financial situation or the general economic situation to improve over the next 12 months. 8 6 4 2 0 2 2006 08 10 12 14 16 18 Percentages of nominal GDP Secondary income balance Primary income balance Trade balance Current account balance + – Chart 2.8 The current account deficit widened to 4.4% in 2018 Q4 UK current account 2 0 4 6 8 10 12 2 0 4 6 8 10 12 14 16 1985 90 95 2000 05 10 15 Per cent Per cent Saving ratio(a) (left-hand scale) Unemployment rate (right-hand scale) Chart 2.7 The low level of the saving ratio may be linked to the low unemployment rate The saving ratio and the unemployment rate (a) Saving as a percentage of household post-tax income. Includes NPISH