Bank of England

Brexit: Bank of England Deputy Governor Warns Business Investment in the UK is Suffering.

Brexit: Bank of England Deputy Governor Warns Business Investment in the UK is Suffering.

The Bank of England’s Deputy Governor has warned that business investment in the UK is suffering as a result of the uncertainty that envelops Brexit.

Ford is set to slash thousands of jobs and Ryanair’s profit margins slump due to the ongoing Brexit uncertainty.  

Business investment plans could be abrogated in the event of a no-deal Brexit withdrawal from the bloc; this is the warning given by the Bank of England’s deputy governor.

During a speech at the Imperial College Business School on May 20th, 2019, given by the Deputy Governor for the Bank of England’s Monetary Policy, Ben Broadbent on investment and uncertainty: the value of waiting for news, he said:

“It’s also clear, from direct conversation and from more formal surveys, that many businesses are apprehensive about Brexit. Over half of the respondents to the Bank’s Decision Maker Panel, a survey of over 7,000 firms, now count Brexit as one of their three most important sources of risk (Chart 2).1 According to a survey by the Bank’s Agents the outcome they think will have the most negative economic impact is a no-deal exit with no agreed transition period. The blue bars in Chart 3 plot what firms expect to happen to their own output and employment in that case. And, over time, the impact of that nervousness has started to come through in the official data. It didn’t to begin with, in the first year or so after the referendum. The series is quite volatile, and prone to revision, so one should be careful not to over-interpret shorter-term movements. But on current estimates, business investment was 3% higher at the end of 2017 than in mid-2016.”

Taken from the Bank of England website.

Business Investment Plans

Mr. Broadbent’s warning suggests that any business investment schemes would most probably be thwarted due to the inconclusiveness and unpredictability that surrounds Brexit and the possibility of leaving the European Union without a deal, which would ultimately have damaging consequences on Britain’s Gross Domestic Product and overall health of the economy.

Following the Bank of England’s investigations and inquiring into how British businesses felt about the prospect of a no-deal Brexit, the conclusion drawn indicates that most firms consider a no-deal Brexit without a changeover period the worst possible scenario for the growth of the UK’s economy.

The Deputy Governor’s concerns come at a time when both the Conservative Party is trying to navigate itself towards the upheaval of Theresa May’s position as Prime Minister, and as the Brexit Party’s popularity grows with the European Parliament elections just around the corner. Both circumstances are backing a withdrawal from the European Union on WTO (World Trade Organization) terms.

On March 13th, 2019, a borrowing budget of around 30 billion British pounds shone new light on the Chancellor of the Exchequer, Philip Hammond’s hopes and plans to bring an end to austerity in his Spending Review.

The Office for Budget Responsibility (OBR) gave a gloomy forecast for the UK’s economic growth, indicating a drop of 0.4 percent for this year after the UK’s economy is likely to shrink by just over 50 billion pounds by 2021 when compared to economic estimates made before the referendum vote in 2016.

Director of the Resolution Foundation, Torsten Bell, suggests:

“In a speech light on policy, the Chancellor used a £30bn windfall from the OBR to promise sunny uplands if Parliament delivers a smooth Brexit in the months ahead.”

“The Chancellor’s £26bn of fiscal firepower is more than enough to bring austerity to an end in the Spending Review later this year. This marks a major shift as the debate in British politics moves to focusing on how much more we should spend, rather than how deeply to cut.”

“But despite improvements to the public finances driven in part by particularly fast earnings growth for high earners, austerity will continue for just about managing families, who face a £1.8 billion hit from the benefit freeze in just three weeks’ time.”

Click here to read the full Press Release.  

According to Ben Broadbent, business investment in the UK dropped last year in each consecutive quarter, something which is unprecedented and despite initial forecasts indicating a marginal recovery in Q1 of 2019, the general business sentiment regarding investments remains pessimistic.

“This is remarkable at a time when the economy has been growing. What’s particularly striking is that firms have been cutting back on investment while adding jobs. Even as investment was shrinking, employment grew in every quarter of 2018, and quite strongly over the year as a whole.”

Taken from the BoE website.

Business investment has deteriorated as a result of the continued delay to a Brexit resolution.

Carmaker Ford has announced intentions to slash at least 10 percent of its global workforce effectively cutting over 6,500 jobs across the globe as well as over 500 jobs in Britain. The plans come as the firm tries to cut down expenses across the Eurozone and America. A 10 percent reduction of its workforce could save the car giant an annual sum of around 600 million USD, which could improve revenue, following a faltering global market with environmental pressure from activists and shareholders to turn to electric vehicles as a way of combating climate change.

Ford set to cut its workforce by 10%

In an email to employees on Monday 20th of May 2019, Ford’s CEO Jim Hackett wrote:

‘To succeed in our competitive industry, and position Ford to win in a fast-changing future, we must reduce bureaucracy, empower managers, speed decision making, focus on the most valuable work and cut costs.’

Click here to read the full article from Forbes.com.

Ford could stop manufacturing larger vehicles with over 5 seats and automatic transmissions that are produced in Bordeaux by the end of the summer. The firm may also reevaluate its business affairs in Russia, and merge two of its UK headquarters into one. The country which would be affected the most by Ford’s cutdown would most likely be Germany because over 5,000 German jobs could be lost by the cuts.

However, Ford has not held the uncertainty surrounding Brexit accountable for its business decision to reduce its workforce across the globe, nevertheless, the US carmaker has warned that a hard no-deal Brexit without an adjustment period could wreak havoc on costs potentially sparking a rise in annual expenses from anything between 500 million to 1 billion US dollars.

Ryanair announces its lowest profits since 2015 and predicts further declines in profit margins for 2019, following lower travel fares as a result of the Brexit unpredictability   

Ryanair profits falter

Michael O’Leary, Ryanair’s CEO, said:

“There is a later booking pattern and we’re having to stimulate bookings with lower air fares. Frankly, if we are in a period where there’s going to be attritional fare wars for a year or two that’s good for Ryanair. Profits will suffer for a year or two and I think that is what our shareholders should expect. Ticket prices will begin to rise again because they are artificially low at the moment.”

Taken from The Irish Post, click here to read the full report.

Ryanair’s after-tax revenue so far dropped by almost 30 percent from around 1.5 billion euros to approximately 1 billion euros when compared to 2018. These results do not include the 140-million-euro loss associated with the Austrian low-cost airline, Laudamotion, which as of January 29th, 2019, is owned by Ryanair. The price of its travel fares stumbled by 6 percent to around 36 euros while the number of customers climbed by 7 percent to around 140 million. Additionally, Ryanair profits were damaged by a rise in fuel costs and employee strikes in 2018.  

‘Ryanair issued a further “cautious” profits warning for the next year, predicting another drop to between €750m and €950m by March 31, 2020. Shares in the budget airline fell by 6% this morning after it revealed its fall in profitability by almost a third.’

Taken from The Irish Post.

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