BoE Agents see little near-term Brexit impact, but potential trouble ahead - ING

James Smith, Economist at ING, suggests that the latest update from the Bank of England's Agents suggests that there is little evidence of a knee-jerk reaction from businesses post-Brexit, but the medium/long-term outlook is more uncertain.

Key Quotes                               

“While today's BoE Agent's Summary largely covered conditions in the month preceding the EU referendum, we note that regional agents also provided an initial insight into the post-Brexit UK economic climate. Painting a similar story to the latest UK jobs data, agents reported little signs of any material pre-referendum slowdown in domestic activity, with the annual rate of activity growth “little changed” in June.

More interestingly, while agents had noted a marked rise in business uncertainty post-Brexit, there was little evidence to suggest any knee-jerk reaction in terms of major employment or investment decisions. The main message was that firms, for the time being, were seeking to maintain “business as usual” and this suggests that it may be a while (possibly after UK-EU negotiations get underway) before we see any material Brexit impact show up in UK data. Further down the road, the outlook appears to be less certain. On investment, approximately a third expected some negative impact over the next 12 months, echoing the sentiment of recent surveys (and potentially this Friday’s PMI data).

The impact of the recent GBP depreciation was seen to have a mixed effect. On the one hand, consumer spending was likely to be dampened by higher import prices. However, the weaker pound was seen to generate a boost to exporters, while there was some talk of investment and production moving back to the UK due to GBP’s significant post-Brexit fall. As we suspected, planned FDI inflows are reported to have been postponed and this will be somewhat of a concern to the BoE given the potential funding difficulties associated with the UK’s sizable current account deficit. Overall, we would not expect any material FDI outflows until the UK’s relationship with the EU gains clearer perspective, but until then the uncertainty should keep the downward bias for GBP in place.

Ultimately, the Bank of England has indicated that it will add stimulus at its August meeting, and the question now is what combination of tools is used. We expect a 25bp rate cut initially, coupled with around £50bn of QE (potentially with more to follow in coming months). There are risks of a stronger focus on credit easing measures, especially given that Agents reported a slight tightening in credit conditions. Overall, this package will be primarily designed to shore up confidence in the near-term and offset some of the effects of elevated uncertainty noted in today's Agents' report.”