9 November 2018


Business surveys point to slower growth at the start of Q4

Business surveys – both from the CBI and elsewhere – point to softer growth at the start of Q4, following a boost to momentum over the summer. Meanwhile, the Bank of England’s MPC decided unanimously to keep interest rates on hold, while continuing to signal further rate rises ahead; the Bank also provided some guidance on what monetary policy may look like in the event of a more disruptive outcome to EU negotiations.

Business surveys point to slower growth at the start of Q4

The CBI’s most recent Growth Indicator highlighted that private sector growth was steady in the three months to October, with similar growth expected in the coming quarter. However, the data also showed that growth in activity had softened notably relative to the summer; this chimed with the IHS/Markit PMIs which indicated a slightly weaker start to Q4, relative to average momentum over Q3. The slowdown in growth momentum is likely to reflect the diminishing impact of the summer boost from the warmer weather and the World Cup. In addition, both our survey data and the PMIs have flagged some waning in manufacturing activity.

Elsewhere, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain rates at 0.75%. Their guidance on the future path of rate rises remains unchanged. The Bank of England’s (BoE) forecasts for GDP remained broadly unchanged (predicated on a smooth transition to a future trading relationship with the EU), but they forecast higher inflation ahead due to higher energy prices in the near-term and stronger domestic cost pressures further ahead.

The BoE also gave some guidance on the outlook for monetary policy in the event of a disruptive outcome to EU negotiations. In this scenario, 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, the economy’s supply capacity could be hit more quickly and to a greater extent than demand – thus pushing up inflationary pressure, and necessitating rate rises rather than cuts. Likewise, a bigger near-term hit to demand may require more monetary stimulus.

The MPC also noted that business investment has disappointed recently. Anecdotes from CBI members and data from CBI surveys continues to suggest that heightened Brexit uncertainty is holding back investment decisions. This chimes with a survey conducted by the CBI on Brexit and contingency planning where 8 out of 10 businesses stated that their investment decisions have been negatively impacted by Brexit, up from 4 in 10 last year.

Further-afield, the IMF’s World Economic Outlook continued to forecast healthy growth in the global economy to the end of next year. However, the tone of the report was notably more downbeat, with the IMF downgrading their forecasts for global growth, driven predominantly by sharp downgrades to the outlook for emerging markets. Additionally, risks to the outlook have become increasingly skewed to the downside, particularly due to rising trade tensions between the US and China. The IMF estimated that a scenario with an extreme escalation in trade tensions could reduce global GDP by 0.4% in the long-term, with the impact greatest for the US, China and other NAFTA partners.

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