The UK economy was on a reasonably firm footing going into the referendum, though growth had lost some of its momentum from last year. While uncertainty was already affecting business confidence, household spending was supported by stable job creation in a low inflation environment.
Since then, the falls in financial markets partly reflect expectations of a weaker outlook for the months ahead. This highlights the need for government leadership, stability and clear signals that the UK is open for business.
In the longer term, confidence will also depend on whether political developments at home and abroad support continued access to the EU’s Single Market, talent from the EU and around the globe, and existing trade deals. Our member businesses are calmly assessing the situation, mindful that our formal relationship with the European Union has not changed yet. And they are rolling up their sleeves and focusing on delivering for their customers.
Sterling has borne the brunt of increased uncertainty, reaching its lowest level against the dollar for 31 years. But a weaker pound could benefit some exporters, making them more competitive overseas. Firms with significant foreign currency earnings and those that compete with imports may also benefit. However, given complex global supply chains, many manufacturers and retailers will also face higher input costs, which will offset some of the competitiveness gains.
Bank shares have been hard hit, reflecting both uncertainty over the future of passporting rights and the impact on banks’ profitability from an expected lower path for interest rates. Other sectors bearing the brunt are commercial property, housing and construction, which are sensitive to broader confidence and capital flows into London; and airlines, reflecting higher fuel costs and expectations of weaker consumer demand.
But comparisons with the financial crisis so far are overdone. The Bank of England has been sure-footed in its response, and is already battled-hardened in dealing with crises. The capital requirements of our largest banks are now 10 times higher than before the crisis, and the Bank stands ready to do what is necessary to protect financial stability.
Earlier this week, Mark Carney relaxed rules around capital buffers to allow for more leeway in lending to businesses and households. This was a welcome move, and we know the Bank of England has more tools in its arsenal if necessary. And our members too have spoken about how liquidity has been available when needed and that markets have continued to function well, despite the volatility.
We are likely to see easing monetary policy in the weeks ahead, with all eyes on the forthcoming MPC meetings. Given the nature of the shock, it seems quite possible that the Bank will prioritise supporting growth – Carney has already flagged the possibility of loosening monetary policy over the summer.
What business and consumers need now is confidence that the UK is open for business, and to talent from around the world. Domestically, there’s much we need to do to address how different regions are sharing in the UK’s prosperity, and part of the answer lies in improving connectivity between UK regions, which will help to boost growth and living standards in cities, towns and villages.
A new CBI report out today highlights that eight out of the UK’s 10 most productive businesses are located outside London. Ensuring they get the help they need, by continuing with planned infrastructure projects, developing local talent and tapping into skills and innovations from around the world has now become more important than ever.