BOE Says Companies Need Clarity as Brexit Crimps Investment

(Bloomberg) -- Bank of England Deputy Governor Ben Broadbent said the shadow of Brexit is holding back U.K. investment, even though the economy has all the right conditions in place for a pickup.

One day after the bank cut its growth forecasts and Governor Mark Carney warned that the outlook is highly dependent on how the U.K. manages its exit from the European Union, Broadbent said that clarity on the divorce is vital for companies.

With the weaker pound boosting exporters’ profits and many firms experiencing capacity constraints and stronger global demand, Broadbent said companies should be investing “quite a lot more.” Instead investment has been broadly flat for the last 18 months.

“That reflects some degree of uncertainty about how Brexit will unfold,” he said on BBC Radio on Friday. “Having said that, this is a negotiation, it’s going to take time. To some degree, this was expected and is to some degree unavoidable. But obviously the sooner one gets a clear picture of where we’re going the better.”

While the BOE says it has a duty to present a realistic assessment of the economy, its latest round of analysis is sure to open it up to fresh criticism from pro-Brexit lawmakers. Carney was accused last year of taking a negative view and being part of what was dubbed “Project Fear” around the referendum on EU membership.

Business Warning

In a sign of businesses’ concerns, the Institute of Directors said on Friday that the U.K. should delay leaving the EU past the March 2019 deadline for divorce talks if all trade areas aren’t resolved. It also recommended membership of the European Economic Area during the transition so the U.K. has single-market access during the period.

The BOE’s latest forecasts for the economy are based on a smooth Brexit, though Carney said on Thursday that the assumption will be tested. With initial exit talks between the U.K. and the EU proving slow and infighting persisting within the British government over how to proceed, some analysts predict the bank may have to revise its outlook as the prospects of an orderly divorce diminish.

“The bottom line for us is that the BOE is probably too optimistic about the chances of the Brexit fog clearing,” Steve Barrow, head of Group-of-10 currency strategy at Standard Bank, wrote in a note. “We think it will get thicker and that will not only reduce (or even eliminate) its ability to lift base rates, but it will weigh heavily on the pound as well.”

Broadbent also said that while uncertainty is weighing on the economy, people are “holding their nerve.” For households, who are seeing real incomes fall amid faster inflation and weak wage growth, he said the “maximum pain” is being felt now and that the situation should improve.