The impact of Brexit on UK businesses: evidence from the Decision Maker Panel 6 March 2018 Any views expressed here are those reported to us by DMP members and do not necessarily reflect those of the Bank of England or any of its Committees or state Bank of England policy.
Measuring Economic Uncertainty Professor Nick Bloom The Bank of England HM Treasury
UK Policy Uncertainty Index – striking Brexit spike 1000 Brexit But it was MASSIVE in the UK: more than twice as large as any event in the last 20 years 800 Policy Uncertainty Index Scottish Referendum 600 Election build-up Euro Crisis Northern Treaty of Rock & 400 Accession General Global / Election Financial Gulf War Crisis II Russian 200 9/11 Crisis/LTCM 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: www.policyuncertainty.com. Monthly data from 2 UK newspapers (Times and Financial Times). Data to July 2016 33
Measuring Economic Uncertainty The Decision Maker Panel project is: • Timely • Well resourced: £1.3m from ESRC, Bank of England, Nottingham and Stanford Universities • Supported by global expertise • Informed by senior executives in more than 3000 businesses across the UK • Engaged with policymakers – MPC, HM Treasury, BEIS, DExEU 44
The panel is continuing to grow in size 3000 Numbe of panel members 2000 1000 0 Month of survey • Response rate is around 50% in any given month 55
It matches the pattern in the UK Business Register Percentage of employment Percentage of employment 70 Manufacturing 60 Construction DMP weighted Wholesale & Retail 50 Business Register Transport & Info 40 Accom. & Food DMP weighted 30 Real Estate Business Register 20 Prof & Admin Human Health 10 Other services 0 0 10 20 30 10-49 50-99 100-249 250+ Number of employees The panel covers nine sectors, and since Jan 2018 include financial firms. It covers large firms and SMEs. We can match firms to a financial database giving their characteristics e.g. size, leverage, profitability, cash flow, etc. 66
DMP members are spread across the UK The concentration in London reflects the fact that many large firms that operate through out the UK nevertheless have their HQ in London. 77
A short online survey asks about expected outcomes e.g. sales revenue 88
You are asked to give chances out of 100 to each outcome Aim for 6-7 questions that take about 10 minutes to complete. 99
Typical data: Distribution of expected sales growth scenarios 0 25 50 -50 0 50 100 Annual nominal sales growth in lowest scenario, % 0 25 50 Share of respondents (unweighted), % -50 0 50 100 Annual nominal sales growth in low scenario, % 0 25 50 -50 0 50 100 Annual nominal sales growth in middle scenario, % 0 25 50 -50 0 50 100 Annual nominal sales growth in high scenario, % 0 25 50 -50 0 50 100 Annual nominal sales growth in highest scenario, % 10 10
How important is Brexit as a source of uncertainty? In September 2016 we asked the question: ‘ How much has the result of the EU-referendum impacted the level of uncertainty affecting your business? ’ We asked the same question in February-April 2017 and in August-October 2017. 11 11
Brexit is considered an important source of uncertainty Percentage of respondents September 2016 February to April 2017 50 August to October 2017 40 30 20 10 0 Not important One of many sources One of top 2 or 3 Largest current sources source 12 12
Brexit as a source of uncertainty by industry Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty Manufacturing Construction Wholesale & Retail Transport & Info Accom. & Food Average Real Estate Prof & Admin Human Health Other services 10 15 20 25 30 35 40 45 50 55 13 13
How does Brexit impact on business decisions and conditions? Sales Companies expect that it is more likely than not that Exports Brexit will reduce their sales Investment and investment ; they Unit costs expect an increase in their Labour costs unit costs, labour costs and financing costs. Financing costs Exports are more or less Wages unchanged. -30 -10 10 30 50 Share of respondents (unweighted), % 14 14
Impact of Brexit on business decisions and economic conditions is rather negative Sales When we weight these responses by firm size – Exports placing more importance on Investment the responses of larger firms – the expected impact of Unit costs Brexit becomes even more Labour costs negative . Financing costs Larger firms are more Wages pessimistic about the -30 -10 10 30 50 impact of Brexit than smaller Share of respondents,% firms. 15 15
Investment growth has been lower for firms who see Brexit as an important source of uncertainty Average annual nominal investment Past year (2017 H1) growth (per cent) 6 4 2 0 -2 -4 -6 Not important One of many One of top 2 or 3 Top source sources Brexit as a source of uncertainty 16 16
Investment growth also lower for firms who expect Brexit to lower sales Average annual investment growth (per cent) Past year (2017 H1) 16 12 8 4 0 -4 -8 No/positive impact expected Chance of negative impact Negative effect likely Brexit impact on sales in 2020 17 17
Estimates of impact of Brexit on aggregate investment growth Past year Next year Brexit reducing future sales -1.6pp to -2.0pp No effect + Brexit related uncertainty -1.0pp to -2.5pp -1.6pp to -1.9pp = Total Brexit effect on -3.0pp to -4.2pp -1.6pp to -1.9pp investment growth in 2017 H1 • Effects on investment growth smaller for year ahead, but still implies levels effect continues to build 18 18
Aggregate business investment growth Percentage change on a year earlier Nominal business investment Counterfactual without Brexit effect 14 12 10 8 6 4 2 0 -2 -4 2013 2014 2015 2016 2017 19 19
How does Brexit impact decisions about relocating abroad? Share of respondents (weighted), % Between May and July 100 2017, panel members were asked about the 80 possibility of moving parts of their business abroad. 60 40 Vast majority said that the chance is zero or close to 20 zero. 0 0% Less than 10% or more One in six panel members 10% said that the chance is Probability 10% or more . 20 20
Brexit impacts decisions about relocating back to UK Share of respondents (weighted), % Considering relocation back to 80 the UK: • 69% said that the question 70 was not applicable (no 60 overseas operations); 50 • 27% said that there was less 40 than 10% chance of relocation to the UK; 30 • and 4% said that there was 20 more than 10% chance of 10 relocation. 0 Not Less than 10% or more applicable 10% 21 21
How much planning time is devoted to Brexit? Table 1 Number of hours a week spent on preparing for Brexit (share of respondents). CEO CFO None 41% 38% Up to 1 hour 37% 39% 1 to 5 hours 14% 18% 6 to 10 hours 3% 3% More than 10 hours 1% 1% Don't know 4% 2% • Around three quarters of CEOs and CFOs are spending no more than an hour a week on preparing for Brexit, but 15-18% spend a up to half a day a week and the remaining 6-10% more than that. • Impact on productivity? 22 22
When do DMP members expect to the UK to leave the EU? Average probability (per cent) 35 Never Transition period 'No deal' 30 25 20 15 10 5 0 2019 2020 2021 2022 2023+ Never • CFOs place less probability on the UK leaving the EU in 2019 since December Summit, and greater probability on leaving 2021 or later. 23
Summary • The DMP is a large new representative business survey • It is an important source of information on how Brexit is affecting UK businesses • The survey shows how Brexit is particularly affecting firms exposed to the EU, but it is not important for all • CFOs expect Brexit to lead to lower sales and higher costs • Brexit is estimated to have reduced investment growth by 3-4pp in the year after referendum 24 24
Brexit as a source of uncertainty by largest export market Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty 55 50 45 40 35 30 25 20 Doesn't export EU Non-EU Largest export market 37 37
Brexit as a source of uncertainty by share of imports in total costs Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty 55 50 45 40 35 30 25 20 0-5% 5-20% 20%+ Percentage of total costs that are imports 38 38
Brexit as a source of uncertainty by share of workforce who are EU nationals Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty 55 50 45 40 35 30 25 20 <1% 1-5% 6-10% >10% Percentage of employees who are EU nationals 39 39
Brexit as a source of uncertainty by productivity quartile Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty 55 50 45 40 35 30 25 20 Lowest Second-lowest Second-highest Highest Productivity quartile 40 40
Brexit as a source of uncertainty by firm size Percentage of respondents who see Brexit as at least one of top 2 or 3 current sources of uncertainty 55 50 45 40 35 30 25 20 10-49 50-99 100-249 250+ Number of employees 41 41
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