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.
“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 degree to which uncertainty is now damaging the economy against a darkening global backdrop.
“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 service-based 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.”
Almost all the executives in Newcastle have already seen evidence of Brexit making it harder to access international markets.
“The [weakness of the] pound is right to export but it doesn’t seem to work somehow. It’s peculiar, people should be buying our stuff,” says Gordon Meek, a livestock and arable farmer, who blamed uncertainty over tariffs that could potentially take effect before an order placed now was shipped.
Mr Dormer says his company stands to lose contracts in the Netherlands and Germany, which used to make up 5 to 10 per cent of his business, because sterling’s volatility has made it impossible to gauge costs. “We’re bidding for contracts in six to 12 months’ time and we’re having to put in clauses conditional on what kind of Brexit we have . . . We’re not even bidding. It’s a waste of time.”
For those companies struggling to keep pace with domestic orders, there is a problem closer to home: recruiting skilled staff, in a labour market where employment is close to record highs. Mr Dormer says his single biggest concern is finding skilled craftsmen — electricians, mechanics or welders — because these mobile but well-paid workers can earn more in the south-east of England. Labour shortages are an endemic issue in UK engineering, but he believes they have become more acute as a result of European workers returning home, and that a “bad Brexit” could make matters worse.
The fundamental problem, shared by everyone around the table in Newcastle, was that the intense political uncertainty, about both the Brexit outcome and the potential for a radical change of government, makes it too risky to press ahead with the investments necessary for their businesses to grow.
Mr Dormer says he had been willing to make an exception for one recent investment — buying a storage facility that became available next to his own premises.
“I bought it because I couldn’t miss the opportunity,” he says, adding that with fears of Brexit disruption stoking demand for increased storage capacity, “maybe it’s not such a gamble, I can make a little bit on the side”.
But the general reluctance to commit has been evident in national data. The level of business investment has barely grown at all since the 2016 referendum.
“People are not brave enough to make the investment. The only deals being done are by people who have to act,” says David Downing, a partner at the commercial property consultancy Sanderson Weatherall, who has seen weak demand from industrial clients, although other areas are doing better.
Mr Saunders argues that doubts over a Brexit resolution have been especially damaging, because businesses expected clarity and delayed decisions they would otherwise have made.
“There isn’t any investment. [People] are busy, business is good, they’ll take on labour . . . but that’s a short-term thing, you can turn labour on and off,” says Mr Moorby, the accountant. “They don’t want to borrow. I think once they understand what the [Brexit] outcome is, they’ll do things.”
Many economists, including some on the MPC, see scope for a rebound in growth if a Brexit deal finally brings clarity, releasing pent-up demand for investment.
Patrick Smith, regional managing director for the white-collar recruitment firm Broster Buchanan, says businesses with skills shortages are “hoarding labour” so that they can respond quickly if demand picks up. To him unemployment seems surprisingly low, given the soft state of the economy.
The most recent official data suggest that the labour market may now be on the turn, after a decade of unprecedented jobs growth and a more recent recovery in real wages. Although the broad picture is still one of strength, figures for September show UK unemployment edging up, wage growth slowing and a continued fall in the number of vacancies.
Moreover, under the terms of the prime minister’s Brexit withdrawal deal, a rebound cannot be relied upon. Samuel Tombs, at the consultancy Pantheon Macroeconomics, says that under the deal negotiated by Mr Johnson’s predecessor Theresa May, business could count on remaining in the customs union and following single market rules for trade in goods.
However, the UK is now on course for a basic free trade agreement, with customs checks and regulatory divergence — and “the potential for another cliff-edge in just over 12 months” if a trade deal cannot be agreed during the transition period.
Economists say the danger is that unemployment could rise abruptly while household incomes fall if Brexit goes awry. “My worry . . . is that consumers could lower their spending, perhaps materially,” Mr Haskel says. Even with a more benign outcome, the UK economy is likely to suffer long-term effects from the extended period of stagnant investment, which will restrict productivity growth, limiting future wage rises.
Mr Haskel has argued that part of the explanation for the UK’s feeble productivity growth is that statisticians struggle to measure investments in knowledge — such as spending on software, design, branding or business processes. Now, however, he believes investment in these more intangible factors is also falling, with implications for productivity. “More and more of the puzzle on productivity is about depressed investment growth,” he says.
Most of those meeting in Newcastle were struggling to chart a course through Brexit, but at least one of those present felt the uncertainty was doing his enterprise no harm — Jim Beirne, the director of the theatre itself.
The Live Theatre is a social enterprise that funds new writing by hosting other businesses, including a gastropub and office accommodation in neighbouring buildings. Mr Beirne says it has already reached its box office target for the year, and that its pub and restaurant are busy.
“[It seems that] when things get bad,” he says, “people do like to go and sit in a darkened room together.”