The latest Bank of England survey of around 700 British businesses paints a positive picture of the UK economy, with firms saying that they intend to invest more despite rising consumer prices and higher business costs.
Investment intentions have rebounded slightly since the EU referendum vote, manufacturing and business services are growing moderately, and there is unlikely to be a cliff edge in prices as companies’ foreign exchange hedges run off, according to the Bank of England agents’ survey published on Wednesday.
Overall economic activity continued to grow at a moderate pace in the first quarter of 2017, the agents found. While retail sales growth had slowed slightly in the face of rising consumer prices, demand for consumer services — including restaurants, bars and tour operators — had continued to rise.
The agents also found that the weaker pound has helped to boost both the number of tourists visiting the UK and the number of Britons taking holidays domestically.
Sterling’s weakness has helped boost export volume growth for manufacturers, and the report added that industry was benefiting from more businesses sourcing inputs from the UK rather than importing them.
IT consultants were benefiting from increased worries about cyber security, while architects and engineers had a pipeline of new infrastructure investment. But demand for lawyers and advertisers was more mixed, the report said, leading business services to grow at roughly the same pace in the first quarter of the year as at the end of 2016.
Investment intentions had become stronger after falling away following the referendum vote last June, and were pointing towards a growth in spending over the next year, the agents found.
But the agents discovered that uncertainty around the UK’s future trading arrangements was weighing on some firms’ longer-term plans.
For example, some companies were looking to lower their energy, labour and materials costs, and were investing in renewables and robotics instead. Others in UK tourism and similar consumer-facing industries had sought to increase their capacity to cope with higher demand.
In a targeted survey of 80 businesses that used hedging to manage movements in the exchange rate, the agents found there had not been an increase in the use of these products before the referendum.
This meant there would not be an “unusually large ‘hump’ of re-hedging to come”, the report said.
Hiring intentions had also not rebounded as much as investment intentions, as companies tried to mitigate the impact of the new minimum wage laws.
The survey found little indication that EU migrant workers were leaving the UK following the referendum, but reported that higher demand from employers was leading to shortages of skilled and experienced staff.
Despite these skills shortages, pay growth is expected to remain around the 2 per cent level, while consumer prices were expected to grow much more rapidly as businesses start to pass on higher costs brought on by the fall in the pound, according to the survey.
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