Demand and output

Section 2 of the Inflation Report - August 2019

  • Output growth was volatile in 2019 H1, largely driven by Brexit-related stockbuilding.

  • Looking through the volatility, underlying output growth appears to have slowed relative to 2018, reflecting the impact of Brexit-related uncertainties and weaker global growth.

  • UK GDP growth has been driven largely by consumption growth.

2.1 Output and near-term outlook

UK GDP data have been volatile in 2019, largely because of Brexit-related effects. After growing by 0.5% in 2019 Q1, GDP increased by 0.3% in the three months to May and is expected to have been flat in Q2 as a whole (Chart 2.1). The MPC had expected volatility in the data, although growth in Q2 is now expected to have been a little weaker than in the May Inflation Report.

Stockbuilding appears to have driven much of this recent volatility (Chart 2.2). As discussed in Box 3 of the May Report, surveys indicated that firms increased their holdings of stocks ahead of the original 29 March Brexit deadline, in order to mitigate the effects of a possible disruptive exit. This is estimated to have boosted domestic output by between 0.1 to 0.2 percentage points in 2019 Q1, largely within the manufacturing sector, as companies in the UK and elsewhere in the EU built inventories of UK products. Erratic monthly moves in output around the turn of the year also boosted growth in Q1.

Stockbuilding is expected to subtract from GDP growth in Q2. At the time of the May Report, firms were expected to hold stock levels broadly flat in Q2, which would have weighed on GDP growth by an amount equivalent to the boost in Q1. Evidence from the Agents and Decision Maker Panel (DMP) Survey suggests that a minority of UK firms that built stocks in Q1 are now running them down. Assuming that EU firms behave in a similar way, stockbuilding is expected to subtract a little more from Q2 GDP growth than it added in Q1.

The expected slowdown in growth in Q2 also reflects a decline in car production. Some firms brought forward their usual summer shutdowns for maintenance to April, in order to mitigate the effect of any Brexit disruption. These shutdowns account for just under 0.1 percentage points of the expected slowdown in GDP growth in Q2 (Chart 2.2).

The volatility in output is expected to extend into the second half of this year. Assuming that companies do not have further shutdowns over the summer, car production is likely to boost GDP growth relative to normal in Q3. This effect should subsequently unwind. Firms’ stockbuilding behaviour around the new Brexit deadline on 31 October will also have an effect on growth. In the MPC’s central projection, stock levels are projected to remain unchanged in Q3, which provides a small boost to growth after the inventory reduction that appears to have occurred in Q2 (Chart 2.2).

Looking through recent volatility, underlying growth appears to have weakened in the first half of the year relative to 2018 to a rate below potential. It is projected to remain subdued in 2019 H2, with business surveys pointing to broadly flat output in 2019 Q3. Given the volatility in official data at present, survey measures can provide a useful guide to underlying trends, as they often abstract from idiosyncratic factors. However, as discussed in Box 3 of the February Report, the relationship between survey responses and GDP growth may be weaker at times of high uncertainty.

The weakness in underlying growth partly reflects a slowing in the world economy: PMIs have fallen across a number of advanced economies over the past year. But the UK’s composite output PMI is now at the bottom of a range of advanced economies (Chart 2.3), so the weakness is likely to also reflect an increase in Brexit-related uncertainties. One area of the economy where this effect may be apparent is in business services and finance, where output growth has slowed sharply (Chart 2.4). Evidence from the Bank’s Agents suggests that a dampened appetite for investment in the UK has led to weaker demand for related professional services. The UK’s financial account does show unusual weakness in foreign inflows of direct and portfolio investment in Q1.

Chart 2.1

GDP is expected to be flat in 2019 Q2
GDP growth and Bank staff’s near-term projectiona

Chart 2.1

  • Sources: ONS and Bank calculations.

    a Chained-volume measure. GDP is at market prices. The blue diamonds show Bank staff’s projection for the first estimate of GDP growth in 2019 Q2 and 2019 Q3. The bands on either side of the diamonds show uncertainty around those projections based on the out‑of‑sample performance of Bank staff’s best-performing model since 2004, representing ±1 root mean squared error (RMSE). The RMSE of 0.1 percentage points around the 2019 Q2 projection excludes three quarters affected by known erratic factors: the 2010 snow and the 2012 Olympics and Diamond Jubilee. Including those erratic factors, the RMSE for 2019 Q2 rises to 0.2 percentage points. For 2019 Q3, the RMSE of 0.3 percentage points is based on the full evaluation window.

Chart 2.2

The volatility in output has been largely driven by Brexit-related effects
Contributions of idiosyncratic factors to quarterly output growtha

Chart 2.2

  • Sources: ONS and Bank calculations.

    a The contributions of idiosyncratic factors are estimated by Bank staff.
    b GDP fell by 0.3% in December 2018, before rising by 0.5% in January 2019.
    c Estimates of the impact of car factory shutdowns are based on ONS car production data.
    d The estimated impact of Brexit-related stockbuilding on Q1 GDP is based on the path of UK manufacturing output in 2019 Q1 relative to other major European economies.

Chart 2.3

Output surveys have weakened across advanced economies
Survey indicators of output growtha

Chart 2.3

  • Sources: Eikon from Refinitiv, IHS Markit/CIPS and Bank calculations.

    a Measures of current monthly composite (services and manufacturing) output for France, Germany, Italy, Japan and the United States. IHS Markit/CIPS composite PMI is unavailable for Canada.

Chart 2.4

Output growth in the business services and finance sector has slowed
Contributions to three-month on three-month output growth in servicesa

Chart 2.4

  • a Chained-volume measures. Contributions may not sum to the total due to rounding.

2.2 Expenditure components of demand

The composition of demand growth in the first quarter of 2019 was broadly in line with the expectation in the May Report: consumption was resilient and stockbuilding contributed positively, but net trade dragged on growth. The moves in all three components over the quarter were larger than anticipated, however.

Stockbuilding and net trade

Stockbuilding made a large contribution to the expenditure measure of GDP growth in 2019 Q1 (Table 2.A), as firms built stocks ahead of the 29 March Brexit deadline. While firms increased their expenditure on stocks, not all of this boosted domestic production. Many of the stocks were sourced from elsewhere in the EU, and so EU goods imports rose sharply in Q1 (Chart 2.5). Goods exports to the EU also rose as EU firms built up stocks of UK goods, but net trade still reduced GDP growth substantially and the trade and current account deficits widened. Survey and monthly trade data to May suggest that both these effects will unwind in Q2, with stockbuilding falling but net trade volumes recovering.

Looking back over a longer period, export growth has slowed markedly since its recent peak in 2017 Q3, and survey indicators have also steadily weakened (Chart 2.6). That is likely to reflect the impact of the slowdown in the world economy (Section 1) as well as the waning effect of sterling’s past depreciation. It is also possible that Brexit-related uncertainty has weighed on demand for UK exports.


Household consumption grew by 0.6% in 2019 Q1 (Table 2.A), stronger than expected at the time of the May Report. That continues the pattern seen over much of the past year, consistent with stronger-than-expected real income and employment growth (see Box 6 of the May Inflation Report).

Growth in ONS retail sales held up in 2019 Q2, but some indicators of spending have softened. The BRC and CBI surveys are pointing to a slowdown in consumption growth (Chart 2.7), but these surveys have smaller samples than the official retail sales data and have not been strongly correlated with consumption growth over the past few years. Consumer confidence — which has had a closer relationship with consumption growth — has held up, with households’ expectations for their personal financial situation close to their historical average (Chart A, Box 3). Taking these indicators together, consumption is expected to grow by 0.3% in 2019 Q2. Consumption growth is projected to be steady in the near term and remain resilient relative to growth in business investment (Section 5).

Consumer credit growth has continued to slow (Chart 2.8), although that is unlikely to have had a material impact on household spending. Around two thirds of the decline since 2016 is accounted for by a slowing in the growth of car dealership finance. As discussed in the May 2018 Report, this largely reflects a past structural change in the way in which car purchases are financed and tells us little about consumption growth. There has also been a slowing in other forms of consumer credit, in particular credit card borrowing. The Bank’s Credit Conditions Survey suggests that this has been driven by a tightening in credit supply, but some lenders also attribute it to a decline in demand for credit. That could suggest weaker spending, but models based on consumer credit growth point to only marginally weaker consumption growth in 2019 Q2 than the MPC’s central projection.

The housing market remains weak, but there have been some signs that it has stabilised. House prices, as measured by the official UK house price index, were broadly unchanged in the three months to May, and more timely measures of prices — such as the Nationwide and Rightmove indices — are suggesting a pickup. House price inflation is expected to be a bit stronger than anticipated in May (Table 2.B). However, as discussed in Box 4 of the May Report, the relationship between house prices and consumption has been weaker than usual in recent years, so this is not expected to have a material impact on consumption growth.

Stronger house price inflation and a lower market path for interest rates are expected to boost housing investment, although it remains subdued in the near term. Growth in housing investment weakened over 2018 (Table 2.A), and private housing starts suggest that weakness will continue. This may reflect increased uncertainty about the outlook for the housing market.

Business investment

Business investment is estimated to have increased by 0.4% in Q1 (Table 2.A), driven by higher investment in buildings and structures. This was stronger than expected in the May Report. Estimates of business investment are more uncertain than usual, however. The introduction of a new accounting standard — IFRS 16 — has affected how some businesses have reported their fixed assets in ONS surveys. The ONS has made an adjustment to the data to correct for this, but the size of the appropriate adjustment is hard to judge. This will continue to affect estimates in coming quarters.

Despite the pickup in the official data, investment intentions have continued to be weak. In particular, the Agents’ score for investment intentions remained at a nine-year low in June. Businesses remain pessimistic about the economic outlook. According to the Lloyds Bank Business Barometer, firms’ expectations for the general economy are well below their historical and post-EU referendum averages.

Weaker global growth (Section 1) has led to a slowdown in business investment growth across the G7. This is unlikely to fully explain the marked weakness in UK investment, however (Chart 2.9). Prior to the EU referendum, UK business investment growth was growing in line with average growth across the rest of the G7. Since then, it has risen by just 1% in the UK, compared to an average of 12% elsewhere.

Brexit-related uncertainties have weighed heavily on UK business investment. The recovery of investment from the 2008 recession was broadly in line with previous episodes until the EU Referendum Act was passed in 2015. Since then, the recovery in business investment has stalled (Chart 2.10). DMP Survey data suggest that the level of nominal investment may be between 6%–14% lower than it would have been in the absence of Brexit uncertainties.1

How firms’ investment spending develops over the near term will therefore be closely tied to how Brexit-related uncertainties evolve. The latest DMP Survey, taken between 5-19 July, showed that fewer firms now expect uncertainty to be resolved by the end of this year, with more expecting it to persist into next year and beyond (Chart 2.11). That could lead to some recovery in investment if companies judge it too costly to wait any longer for a resolution to become apparent. Nonetheless, the MPC judges that Brexit-related uncertainties will continue to weigh on investment. Even if a deal is agreed, it may not lead to a material recovery if businesses do not gain much clarity about the eventual trading relationship with the EU immediately. That effect could be larger if they view the outcome as likely to hamper demand for their products. The latest Agents’ survey on EU withdrawal suggested that investment would be unlikely to pick up substantially in the near term even in a scenario where a Brexit deal is agreed (Box 2).

Overall, business investment is projected to fall over the rest of 2019. This is despite limited spare capacity and accommodative credit conditions which would be expected to support spending.

Table 2.A

Consumption growth was resilient in 2019 Q1
Expenditure components of demanda

Table 2.A

  • a Chained-volume measures unless otherwise stated.
    b Includes non-profit institutions serving households (NPISH).
    c Investment data take account of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2.
    d Excludes the alignment adjustment.
    e Percentage point contributions to quarterly growth of real GDP.
    f Includes acquisitions less disposals of valuables. The pickup in 2019 Q1 can largely be accounted for by an increase in the imports of valuables, including non-monetary gold. Movements in non-monetary gold do not affect headline GDP as they are recorded as equal and offsetting impacts on gross capital formation and net trade.
    g Excluding the impact of missing trader intra-community (MTIC) fraud.

Chart 2.5

Trade with the EU rose in Q1 and fell back in Q2 largely due to stockbuilding
Contributions to three-month on three-month growth in goods imports and exports by areaa

Chart 2.5

  • a Chained-volume measures. Goods exports and imports are measured excluding trade in unspecified goods.

Chart 2.6

Survey indicators of export growth have weakened steadily
UK exports and survey indicators of export growtha

Chart 2.6

  • Sources: Bank of England, BCC, CBI, IHS Markit/CIPS, Make UK, ONS and Bank calculations.

    a Survey measures are scaled to match the mean and variance of four‑quarter export growth since 2000. Agents’ measure shows manufacturing companies’ reported annual growth in production for sales to overseas customers over the past three months; last available observation for each quarter. BCC measure is the net percentage balance of companies reporting that export orders and deliveries increased on the quarter; data are not seasonally adjusted. CBI measure is the average of the net percentage balances of manufacturing companies reporting that export orders and deliveries increased on the quarter, and that their present export order books are above normal volumes; the latter series is a quarterly average of monthly data. The Make UK measure is the average of the net percentage balances of manufacturing companies reporting that export orders increased over the past three months and were expected to increase over the next three months; data available since 2000 Q3. The IHS Markit/CIPS measure is the net percentage balance of manufacturing companies reporting that export orders increased this month compared with the previous month; quarterly average of monthly data.
    b Chained-volume measure, excluding the impact of MTIC fraud.

Chart 2.7

Official retail sales data have been stronger than a range of other indicators
Retail sales volumes and survey measures of retail salesa

Chart 2.7

  • Sources: British Retail Consortium (BRC), CBI, ONS, Visa and Bank calculations.

    a All survey indicators have been scaled to match the mean and variance of ONS retail sales volume growth since 2000 except the Visa series, which is since 2006.
    b Chained-volume measure.
    c Balance of respondents to the CBI distributive trades survey question ‘How do your sales and orders this month compare with a year earlier?’.
    d Percentage change in Visa total consumer spending on a year ago, deflated by CPI inflation.
    e Percentage change in total sales. Not seasonally adjusted.

Chart 2.8

Consumer credit growth has continued to slow
Contributions to annual consumer credit growtha

Chart 2.8

  • Sources: Bank of England, ONS and Bank calculations.

    a For a description of how growth rates are calculated using credit data see here.
    b Sterling net lending by UK monetary financial institutions (MFIs) and other lenders to UK individuals (excludes student loans).
    c Identified dealership car finance lending by UK MFIs and other lenders.

Table 2.B

Monitoring the MPC’s key judgements

Table 2.B

Chart 2.9

UK business investment has been weaker than in other advanced economies
G7 business investment

Chart 2.9

  • Sources: Eikon from Refinitiv, Japanese Cabinet Office, OECD, ONS, Oxford Economics, Statistics Canada, US Bureau of Economic Analysis and Bank calculations.

    a Business investment is not an internationally recognised concept. This swathe includes similar series derived from other countries’ National Accounts. Private sector business investment for Italy. Business investment minus residential structures for Canada. Non‑residential private investment for Japan and the US. Non‑government investment minus dwellings investment for France and Germany.
    b Chained‑volume measure.

Chart 2.10

Business investment has stalled since the referendum
Business investment after previous recessionsa

Chart 2.10

  • Sources: ONS and Bank calculations.

    a Chained-volume measure. Recessions are defined as at least two consecutive quarters of negative GDP growth. Previous recessions include those beginning in 1973, 1975, 1980 and 1990. A recovery ends if a second recession occurs in the period shown.

Chart 2.11

More firms now expect Brexit uncertainty to persist at least into next year
Expected date by which Brexit-related uncertainty is expected to be resolveda

Chart 2.11

  • Source: DMP Survey.

    a Question: ‘When do you think it is most likely that Brexit-related uncertainty facing your business will be resolved?’. Data are for the percentages of businesses that state that they are affected by Brexit-related uncertainty. The DMP consists of around 8,000 businesses with around 3,000 responses received to the survey each month.
    bThe July survey was taken between 5-19 July.

Box 2 Agents’ update on business conditions

The key information from Agents’ contacts considered by the Monetary Policy Committee at its August meeting is highlighted in this box.1

Recent developments

Activity had slowed in the past three months compared with a year ago, particularly in manufacturing and construction.2 Most of that was due to temporary factors, but it also partly reflected weaker underlying growth.

The Agents’ scores for manufacturing output and exports were their lowest in almost three years. This partly reflected one-off effects from an unwinding of stockbuilding and shutdowns in car production that had been brought forward from the summer. Nonetheless, there were also signs of weaker underlying demand for exports as global growth had slowed.

Construction sector activity contracted, as major infrastructure projects had been put on hold and house-building activity had eased.

Business services growth was modestly weaker, reflecting depressed demand for financial, corporate advisory and hospitality services. Part of that could be due to Brexit-related uncertainty. However, demand for logistics and IT services remained buoyant.

Agents’ survey on preparations for EU withdrawal

The Agents surveyed over 300 business contacts on their preparations for EU withdrawal — the sixth vintage of the survey to date.3

In the latest survey, about a third of respondents reported being more uncertain about the economic outlook now than they had been prior to the extension of the EU withdrawal deadline — around double the proportion that answered that way in the June survey (Chart A). Just over half of respondents reported no change in uncertainty, down from three quarters of respondents in the June survey.

When asked about their contingency plans for Brexit, almost 90% of respondents said that they had implemented contingency plans ahead of the March withdrawal deadline (Chart B).

Half of respondents said they would maintain the plans they had in March and a quarter of companies said they would increase planning. A small proportion of companies said that they would scale back previous plans, but discussions with contacts suggested that most of those expected to reintroduce plans ahead of the EU withdrawal deadline on 31 October.

Asked about their readiness for a no-deal Brexit, three quarters of respondents said that they considered themselves ‘as ready as they can be’, and just under a fifth described themselves as ‘fully ready’. This was similar to the June survey.

Authorities have taken steps to improve the preparedness of the real economy for a disorderly Brexit. The UK has announced Transitional Simplified Procedures for customs checks at the border and a temporary waiver on security checks. The Port of Calais and Eurotunnel announced that they have completed their preparations on French border infrastructure. Agreements have been signed to roll over existing EU trade deals with the rest of the world representing about 5½% of the UK’s total goods trade.

As set out in the July 2019 Financial Stability Report, the core of the financial system is resilient to and prepared for the wide range of risks it could face, including a worst-case disorderly Brexit. Most risks to financial stability that could arise from disruption to cross-border financial services in a no-deal Brexit have been mitigated. UK legislation ensures that UK households and businesses will be able to continue to receive services from EU banks, insurers, asset managers and central counterparties.

However, material risks of economic disruption remain. For example, most of the 240,000 UK businesses that currently trade solely with the EU do not yet have Economic Operator Registration and Identification (EORI) numbers. EORI registration is the first of a series of actions that need to be carried out in order to be ready for EU border inspections. Businesses will also need to ensure they have the correct certification in place to be able to continue selling their products in the EU.

The Agents’ survey showed that even those companies that considered themselves ‘ready’ for a no-deal Brexit thought that output, employment and investment would be substantially lower over the next year in that scenario, relative to one in which there was a deal (Chart C).

Companies that said they were better prepared for a no-deal Brexit generally expected a smaller negative impact on output, employment and investment than those that said they were ‘not ready’ for a no-deal Brexit (Chart D).

Agents’ survey on the labour market

The Agents also surveyed around 350 business contacts on their outlook for employment and pay growth.4

Asked how they expected staff numbers to change over the next 12 months, around a third of respondents said that they expected staffing levels to be broadly unchanged (Chart E). Around a quarter expected to increase staffing by between 1% and 5%. On balance, firms expected a modest increase in staffing levels over the next 12 months, though to a slightly lesser extent than over the past 12 months. This is broadly consistent with the Agents’ score on employment intentions, which has drifted down in recent years.

Companies were also asked about the effect of a variety of factors on employment levels (Chart F). On balance, companies reported that increases in labour productivity had reduced the number of staff needed over the past 12 months and that this was likely to continue in the next 12 months. Companies reported that demand for their outputs would increase employment in both years.

There was an increase in the balance of companies citing economic/political uncertainty as a factor leading to reduced employment levels for the next 12 months compared with the previous 12 months.

There were widespread reports that recruitment had become more difficult compared with a year ago, including for non-UK EU workers. This was most pronounced in the construction and business services sectors. Companies reported taking a variety of measures to address recruitment and retention difficulties. These included increasing pay, providing training, offering flexible working and other benefits, and making improvements to working conditions.

Despite recruitment difficulties, pay growth appeared to have stabilised, and the survey suggested that wage growth in 2019 would be similar to last year. Of the measures that firms said they would take to cover the cost of wage growth, the most commonly cited one was to increase productivity. Fewer companies expected to accept lower profit margins, except among firms in the consumer services sector, where that response was more prevalent (Chart G).

Although the Agents’ scores for investment intentions have been very weak, the survey suggested that the balance between capital and labour may be shifting towards capital (Chart H). Growth in the UK capital to labour ratio has remained much lower than its pre-crisis pace although the ratio has risen in recent years (Box 4). The majority of respondents in the survey reported no change in the capital to labour balance over the past 12 months. However, around a quarter of respondents said that they had moved toward using more capital, and around a third of respondents expected this to be the case over the next 12 months.

In general, those contacts moving towards capital were more likely to have experienced difficulty recruiting over the past year. This was not the case in retail, however, where some contacts said they were looking at automation — for example in self-service technology and automated warehouses — in order to reduce costs and headcount. Manufacturers were more likely to be looking at investment in factory automation. And business services reported spending on IT and software upgrades to increase productivity.

Among contacts who reported shifting the balance towards labour, some said that they were doing so because investment was constrained. Others said that more staff were required to service parts of their business that were growing. In a few instances, contacts reported maintaining current headcount in the face of lower demand. This was because they feared that it would be difficult to replace lost skills when demand recovers.

  • 1. A comprehensive quarterly report from the Agents on business conditions is published alongside the MPC decision in non-Inflation Report months. The next report will be published on 19 September 2019.

    2. This is a summary of economic reports compiled by the Agents during June and early July 2019. References to activity and prices relate to the past three months compared with a year earlier. The Agents’ scores are available here.

    3. The survey was conducted between 17 June and 5 July. There were 318 responses from companies employing over 500,000 employees. Responses were weighted by employment and then reweighted by sector employment.

    4. The survey was conducted between 7 June and 9 July. There were 349 responses from companies employing nearly 600,000 employees. Responses were weighted by employment and then reweighted by sector employment.

Chart A

Companies are more uncertain about the outlook
Change in uncertainty since the Brexit deadline extensiona

Chart A

  • a Companies were asked ‘Are you more or less uncertain about the economic outlook now than you were prior to the extension of the EU withdrawal deadline to the end of October 2019?’.

Chart B

Most companies have contingency plans for Brexit
Brexit contingency plansa

Chart B

  • a Companies were asked ‘How has the Brexit extension affected your contingency plans?’. Bars may not sum to 100 due to rounding.

Chart C

Companies expect output, employment and investment to be much lower in a no-deal Brexit
Expectations for the effect of Brexita

Chart C

  • a Companies were asked ‘Relative to the last 12 months, what is your expectation for the following aspects of your business over the next year in each scenario: (a) a deal and transition period and (b) no deal and no transition period?’. For each relevant business factor, respondents were asked to choose between ‘Fall greater than 10%’; ‘-10 to -2%’; ‘Little change’; ‘+2 to +10%’; and ‘Rise greater than 10%’.
    b Net percentage balances of companies reporting increases or declines in each factor, weighted by employment. Half weight was given to the ±2%–10% response and full weight was given to those that responded ‘Rise/fall greater than 10%’.

Chart D

Firms that are less ready for a no-deal Brexit expect a larger negative economic impact
Net balances under a no-deal scenario minus that under a deal and transitiona

Chart D

  • a The net percentage balance under a no-deal Brexit scenario minus that under a deal scenario. The more negative the figure, the larger the perceived detrimental impact of a no-deal Brexit relative to a deal scenario. The method for calculating the net balance is set out in footnote b of Chart C.

Chart E

Companies expect to increase staffing over the next year

Changes in staff numbersa

Chart E

  • a Companies were asked ‘How have staff numbers changed over the past 12 months; and how do you expect them to change going forwards (over the next 12 months)?’. Respondents were asked to choose between the five options shown in the chart.
    b Net percentage balance of companies reporting increases or declines in staffing, weighted by employment. Half weight was given to the rise/fall 1%–5% response and full weight was given to those that responded rise/fall >5%.

Chart F

Increased labour productivity and uncertainty are reported to reduce employment levels
Reasons for changing staff numbersa

Chart F

  • a Companies were asked ‘How have changes in the following factors affected employment levels over the past 12 months and how do you expect them to affect employment over the next 12 months?’. Contacts were asked to choose between: ‘Reduce’; ‘No impact’; or ‘Increase’.
    b Net percentage balance of companies reporting that each factor was increasing or reducing employment levels.

Chart G

Firms expect increased productivity to help cover the cost of wage growth
Measures to cover the cost of rises in wages per heada

Chart G

  • a Companies were asked ‘If wages per head are growing, how do you expect to cover that cost?’. For each factor, respondents were asked to choose between ‘Not at all’; ‘Moderately’; and ‘Mostly’.

Chart H

More firms expect to shift towards using more capital than towards more labour
Changes in the capital to labour mixa

Chart H

  • a Companies were asked ‘Have you changed the balance of labour and capital inputs over the past 12 months; and do you expect it to change over the next 12 months?’. For each period, respondents were asked to choose between ‘More labour than capital’; ‘Little change in balance’; and ‘More capital than labour’.

Box 3 Households’ expectations: evidence from the latest NMG survey

The NMG survey is a biannual household survey commissioned by the Bank. The latest survey, conducted between 10 April and 1 May, covered over 6,000 households. This box covers households’ expectations for their finances, the housing market and interest rates. The information from the survey on households’ debt positions is covered in the July 2019 Financial Stability Report.

In the latest survey, households’ expectations for the general economic situation deteriorated slightly, while expectations for their own financial situation held up. These trends have been apparent for some time, and mirror those in the GfK/EC consumer confidence survey (Chart A).

The resilience in households’ expectations for their own financial situation probably reflects their confidence about jobs and pay prospects. While more households expect the general economic situation to deteriorate, the proportion of households expecting to lose their job or experience an absolute decline in their income over the next year ticked down in the latest survey.

Despite households’ resilient confidence about their own financial situation, the net balance expecting to increase their spending over the next year fell. This fall does not appear to be driven by lower expectations for income growth (Chart A). Many respondents attributed the fall to the impact of Brexit.

In the NMG survey, households’ expectations for the housing market continued to be weak, with house prices expected to decline a little over the next 12 months. The May Report discussed the role of Brexit-related uncertainty in suppressing housing demand and the survey provides some evidence to support that. Around 20% of households who expect to move house in the next two years reported having delayed moving due to Brexit-related uncertainty.

The survey also asked about households’ inflation expectations, which were little changed compared to the previous survey. One and two-year expectations were stable like most other household measures (Section 4) at around 2.1%. Expectations at the five-year horizon have remained around 2.4% since the question was added to the survey in 2015.

On average, households continued to expect a limited and gradual increase in interest rates in the latest survey. Expectations are a little lower than in the previous survey (Chart B); the market-implied path for interest rates has also fallen over that period.

Chart A

Households’ expectations for their own financial situation remained stable
Households’ expectations in the NMG and GfK/EC surveys

Chart A

  • Sources: GfK/EC, NMG Consulting and Bank calculations.

    a Question: ‘Over the next 12 months, how do you expect your total household income (before anything is deducted for tax, National Insurance, pension schemes etc) to change?’.
    b Question: ‘How do you expect your household to change its spending over the next 12 months? Please exclude money put into savings and repayment of bank loans’.
    c Question: ‘How do you expect the financial position of your household to change over the next 12 months?’.
    d Question: ‘How do you expect the general economic situation of this country to develop over the next 12 months?’.

Chart B

Households continue to expect a limited and gradual increase in interest rates over the next two years
Expectations for interest rates

Chart B

  • Sources: Bloomberg Finance L.P., NMG Consulting and Bank calculations.

    a Estimated using instantaneous forward overnight index swap rates over the period of the respective NMG survey.
    b Question: ‘The level of interest rates set by the Bank of England (Bank Rate) is currently 0.75%. At what level do you expect that interest rate to be in each of the following time periods (1 year, 2 years, 5 years)?’.
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