Economic News

CBI Economic Update: Bank of England “Super Thursday”: MPC on hold in the face of Brexit uncertainty

“Super Thursday” saw the Bank of England’s Monetary Policy Committee (MPC) vote unanimously (9-0) to maintain rates at 0.75%. The decision to keep monetary policy unchanged was in line with the CBI’s and consensus expectations.
The MPC’s guidance on the future path of rate rises remained unchanged: an ongoing tightening in monetary policy will be necessary to return inflation to target, assuming that the economy continues to evolve in line with the MPC’s forecast.
The MPC’s forecast for GDP growth was largely unchanged – they expect the economy to continue growing modestly, but above its “potential” rate.
However, they expect higher inflation ahead – due to higher energy prices in the near-term, and stronger domestic cost pressures further ahead. The combination of above-trend growth and higher inflation seems to corroborate the MPC’s guidance on the future path of monetary policy.
The Bank’s forecasts remained conditioned on a range of outcomes for the UK’s future trading relationship with the EU, and they assume a smooth transition to such an eventual relationship.

BoE less upbeat on a “rotation” of economic growth

The MPC noted that the UK economy is being supported by stronger-than-expected household spending, underpinned by a tight labour market and resilient household confidence.
However, business investment had been weaker than expected, and uncertainty surrounding the outcome of Brexit negotiations was expected to continue weighing on investment ahead. Nonetheless, the MPC expect a rebound from 2020, as uncertainty over the future UK-EU relationship fades.
The Bank of England still expect net trade to support the UK economy ahead, due to the low exchange rate and relatively supportive global trading environment. However, the MPC note that global trade risks are skewed to the downside due to trade tensions, tighter financial conditions (especially in emerging markets), and lowered risk appetite.
Notably, BoE governor Mark Carney was much less vocal about a “rotation” of growth towards business investment and net trade than in previous Inflation Reports
The Bank’s forecasts have not factored in the announcements from this week’s Budget (as they fell outside of the MPC’s cut-off period for finalising their numbers). Given the range of fiscal giveaways announced, they would likely push up the Bank’s growth forecasts modestly.

Inflation expected to be higher, and above target for longer

The MPC’s forecast for GDP growth is broadly unchanged from August, with the economy expected to grow at an average pace of 1.8% y/y through to the end of 2021, above the Bank’s estimate of potential growth (1.5%). This is set to push up domestic inflationary pressures, which is the key reason why the MPC expect to raise interest rates further going forward.
The Bank also expect higher CPI inflation in the near-term due to increased oil, gas, and electricity prices. Further ahead, the impact of higher energy prices and the past depreciation in the pound are expected to wane, gradually replaced by growing domestic cost pressures (largely driven by wage growth) as the main upward driver of inflation.
The persistence of domestic cost pressures means that the MPC expect CPI inflation to fall to its target of 2% only beyond their two-year target horizon, in the second half of 2021.

MPC prepared to move interest rates “both ways” after Brexit

The Inflation Report laid out some of the MPC’s thinking on how a range of Brexit outcomes could affect monetary policy.
In general terms, the MPC sees Brexit as both a near-term demand shock (on trade, investment and households adjusting spending in line with their expectations of future incomes) and hitting the UK’s supply capacity (through productivity, shifts in production abroad, etc.). The extent of these changes to demand and supply vary on if the outcome of negotiations is “smoother” or more “disruptive”.
Consequently, the MPC stated that it is prepared to either increase or decrease interest rates depending on how Brexit affects the economy; specifically on the balance of how much demand is affected relative to supply.
For example, in the event of a “no deal” Brexit, the economy’s supply capacity could be hit more quickly and to a greater extent than demand – thus pushing up inflationary pressure.

The BoE’s increased focus on Brexit risks in this press conference, and its implications for monetary policy, may be in response to speculation that the Bank of England would cut interest rates in the event of a “no deal” Brexit.

Latest Economic data – October 2018:

CBI surveys suggest that warmer weather has boosted growth over Q3, however these effects are likely to be temporary and are expected to unwind towards the end of the 2018
The underlying UK growth picture remains subdued, with conditions for consumer-facing firms remaining particularly challenging due to the ongoing squeeze on household incomes. In contrast, the strength in the global economy is expected to continue supporting manufacturing export growth
CPI inflation edged higher in August, contrasting with consensus expectations of a slight fall.
The UK economy grew by 0.4% in Q2 2018, according to the ONS’ second estimate of GDP. This was unrevised from the first estimate released last month.

Voluntary “real living wage” set for a 2.8% increase this week: It will increase to £9 an hour. This is not to be confused with the compulsory National Living Wage, which is currently £7.83 an hour for anyone over the age of 25.

Real living wage employers in London will pay an extra 3.4%, bringing the minimum hourly rate to £10.55. The rate is independently calculated, to reflect what people need to spend to feed, clothes and house themselves.

FDF Brexit Update: It was Halloween on Wednesday so it was quite fitting that I spent most of the day discussing the chilling prospect of a ‘no-deal’ Brexit with civil servants and others. The Government machine is gearing up to manage the practicalities that a ‘no-deal’ Brexit might bring and we are doing our best to help them. It is, though, a scary thought that a ‘no-deal’ Brexit might be less than five months away.

A more immediate sign of concern came from our own business confidence survey. It told us that more than a third of food and drink manufacturers are facing increased costs as a result of stockpiling ahead of a possible ‘no-deal’ Brexit. A more general takeaway from these results is just how seriously the food and drink industry is taking the prospect of a ‘no-deal’ Brexit.

Also on Wednesday FDF’s Chief Operating Officer Tim Rycroft gave evidence at the London Assembly’s EU Exit Working Group. The focus was on how a ‘no-deal’ Brexit would look to the London economy, the consequences on businesses and on Londoners. FDF’s expertise was warmly welcomed by the group, and most of the discussion centred around issues for the food and drink industry. The sheer importance of the issues raised has prompted the EU Exit Working Group to write not just to the Mayor, but also direct to Government on this matter. It is also sharing its findings with the devolved governments in Belfast, Cardiff and Edinburgh. It is good to see this focus on food and drink: there will be further ‘no-deal’ preparedness pressure applied to Government from yet another important group for business in the UK.

Fiscal Phil has also acknowledged the seriousness of a ‘no-deal’ Brexit. In his Budget 2018 statement to the House of Commons on Monday, the Chancellor confirmed that he will upgrade the Spring Statement into a ‘full fiscal event’ in the event of a ‘no-deal’ Brexit come 29 March next year: the highest echelons of Government are taking the prospect of a ‘no-deal’ ever more seriously. As an aside, I was particularly pleased to see the reforms that the Chancellor announced on the Apprenticeship Levy, as well as the announcements that will benefit productivity, exports, infrastructure, enterprise, business rates and investment. You can read FDF’s budget letter to the Chancellor here, and our media reaction here.

If there are no indications next week that a deal has been reached, then there will be full-scale parliamentary preparations for a no-deal Brexit: with a schedule of implementation plans launched in the week beginning 12 November. Routine business in parliament will be effectively suspended to allow time for a ‘no-deal’ legislation, both primary and secondary. Predictions will be an instruction to more than 150,000 businesses who only sell within EU to start registering for customs duties.

This is in stark contrast to the suggestion in a letter from Brexit Secretary Dominic Raab to the Chair of the Exiting the EU Commons Committee Hilary Benn that emerged this week. The letter said that “I would be happy to give evidence to the committee when a deal is finalised, and currently expect 21 November to be suitable”.

Finally, I really encourage you to join FDF for our Brexit Essentials – The Guide for Food and Drink Producers event on 4 December. The event will be covering supply chain, financial, workforce, and food regulation essentials. The expert led sessions will provide attendees with practical advice, whatever kind of Brexit we face.

Other News

The Department of Health and Social Care (DHSC) has today published the paper titled “Prevention is better than cure”. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/753688/Prevention_is_better_than_cure_5-11.pdf

The document sets out the Government’s vision to “ensure that people can enjoy at least five extra healthy, independent years of life by 2035, while narrowing the gap between the experience of the richest and poorest”.

The document includes actions to support healthier food choices, including intentions to set ambitious goals for salt reduction next year.

GSCOP Extended to Ocado and B&M Home Stores: On Thursday, the Competition and Markets Authority (CMA) announced that Ocado and B&M Home Stores have been added to the existing list of ten designated retailers that must comply with the Groceries Supply Code of Practice (GSCOP). This follows a consultation in January 2017 in which FDF urged Government to extend the code to additional large retailers and wholesalers that had been seen to abuse their commercial power. For more information contact Dominic Goudie in the FDF Competitiveness team.

The Budget’s Proposed Plastics Tax: In the Budget the Chancellor announced the Government is to push ahead with plans to introduce a new tax on plastic packaging which contains less than 30 per cent recycled plastic from April 2022, subject to consultation.

This forms part of a cross-government package of measures to address single-use plastic waste, including reform of the Packaging Producer Responsibility system. Further detail is expected to be set out in the forthcoming Resources and Waste Strategy.

The Treasury has not indicated when the plastics tax consultation will be launched, only that they are keen to consult alongside the consultation on PRN reform, so should be opening it before the end of this year. Monday’s announcement also included £20m of new funding for innovation both for plastics research and development, and increasing recycling and reducing litter.

It was also confirmed on Monday that the Government has taken a possible incineration tax and disposable cups tax – known as the “latte levy” – off the table for now, but may return to these later if insufficient progress on their reduction is made by industry.

Food Allergy Labelling Review Due January 2019: The Department for Environment Food and Rural Affairs (Defra) and the Food Standards Agency (FSA) have been working together at pace following the Government’s announcement of an urgent review of the food allergen labelling framework. A 6-week consultation is expected in early January 2019. The Government is considering both regulatory options – such as mandatory written allergen labels, ingredient listing and ‘ask the staff/managers’ stickers on foods – as well as non-regulatory options – such as extending the #easytoASK campaign.

Healthy eating an increasingly significant issue for Scottish people: Food Standards Scotland (FSS) has published the results from the latest wave of its “Food in Scotland” Consumer Tracking Survey, which shows that healthy eating is an increasingly significant concern for people in Scotland. Ensuring they and their families eat a healthy, balanced diet was a “top concern” for 25% of those questioned, up 8% since the start of tracking in 2015. Despite more than half (58%) regarding their own diets as being healthy, 90% of respondents indicated they were concerned about the levels of salt, sugar, fat and saturated fat found in food. Nearly half (49%) agreed that affordability is a barrier to healthy eating.

MPs debate folic acid food fortification: Nigel Adams opened a debate on folic acid food fortification on 25 October, during which MPs from all parties welcomed the Government’s decision to consult on mandatory flour fortification with folic acid in early in 2019. Owen Smith, Will Quince and Rebecca Pow were among the MPs to note that neural tube defects typically occur very early during pregnancy and as many pregnancies are unplanned, folic acid supplementation is not a sufficient means of protecting foetuses. He noted that the Committee on Toxicity of Chemicals in Food, Consumer Products and the Environment (COT) has not yet published its final conclusions on tolerable upper limits for folate and said Ministers look forward to receiving that advice. COT does consider that the potential masking of pernicious anaemia is still an appropriate and relevant endpoint on which to base a tolerable upper level and, pending further analysis of the data was necessary, suggested that the upper level would not be less than 1 microgram a day (which could be increased) as there is no convincing evidence that masking occurred at levels of intake below 1 microgram a day. The Shadow Public Health Minister, Sharon Hodgson, pointed out that modelling undertaken by Food Standards Scotland in 2017 indicated that fortification at the recommended levels, with a capping of voluntary fortification and supplements, can achieve the reductions in NTD risk without increasing the number of people consuming the upper recommended limit. Mr Adams confirmed the Government is committed to acting in response to the consultation, which would be launched early in 2019, as soon as possible.

Scottish Government extends support for healthy convenience foods: The Scottish Government has announced that extra funding has been made available for 2019 to support Scottish convenience stores under a scheme which promotes fresh, local and healthy produce.

FDF Seminar: Secure your place at our training session Brexit Essentials – The Guide for Food and Drink Producers. Taking place on Tuesday 4 December, the session will gather a range of experts on various topics related to Brexit including workforce, regulations, and customs and trade, for a discussion.

FDF Event: Next year, our nutrition event Feeding Change will take place on 7 February 2019. The event will explore key themes of the Westminster and Scottish Government’s plans for addressing childhood obesity and industry’s response to them.

On Brexit: What the Nation Really Thinks (Channel 4, 20:00 5 November), as the Prime Minster tries to deliver a Brexit that works for the country as a whole, this programme reveals what the British people think of the likely deal on offer. Channel 4 commissioned the largest independent survey of attitudes on Brexit across the whole of the UK since the referendum, asking 20,000 people drawn from every UK constituency for their views, and put the results to politicians and those who stand to gain, or lose, most from the outcome; all before a live studio audience