Bank of England Deputy Agent (North East) Andrew Hebden
Bank of England Deputy Agent (North East) Andrew Hebden looks at the prospects for the region’s economy in 2017.
Each year when I pen this feature for the BQ Yearbook I like to look forward as well as back at the 12 months just gone. After all, one of the major functions of the Bank of England is to forecast what’s going to happen to the economy.
It’s a tough job at the best of times – and we’re the first to admit that we rarely get it absolutely right. However, with levels of uncertainty particularly high at the moment, that job’s arguably tougher than ever. The word ‘uncertainty’ crops up a lot in discussions I’ve been having with businesses across the North East. And evidence from a range of measures that the Bank looks at suggests uncertainty has been higher than normal since June’s referendum on the UK’s membership of the European Union. Despite that, the economy has continued to perform more strongly than many – including the Bank of England – had expected.
One area of strength which has been important in sustaining growth in consumer spending during 2016 has been the labour market: employment levels are high and wages have been growing faster than inflation. The North East has been central to that story.
The latest data available at the time of writing show there are now more people in work in the North East than at any time in history – more than 1.2million. And the employment rate of 71.1% is almost at a record high. Unemployment in the North East has fallen by 30,000 in just 12 months, compared with 145,000 across the UK as a whole. In other words, the North East contributed to a fifth of the total reduction in UK unemployment - completely out of proportion for the size of the region. At the same time, the number of people in employment in the region increased by 48,000. That is equivalent to seven times the number of people directly employed by Nissan.
Growth in the economy since the summer has been supported by a package of measures introduced by the Bank of England’s Monetary Policy Committee (MPC) in August. This included a small cut in interest rates which reduced mortgage repayments for many households and the cost of borrowing for companies.
However, businesses will typically only invest if they are confident about the outlook. And some tell us they remain quite cautious. That weaker outlook for investment is a concern as we begin to look to the future. The MPC’s growth forecast for next year is stronger than that set out back in August, reflecting the economy’s robust recent performance. But the outlook for 2017 and 2018 is weaker, partly due to that weakening in investment intentions. The other key factor is the lower value of the pound which has fallen sharply since the summer and which will make imports more expensive. This is expected to push up prices, weighing on consumer spending growth.
Faced with a period of inflation above its 2% target, the Bank might be expected to increase interest rates. But that period will be temporary. And it is expected to happen alongside modest growth and rising unemployment. The Bank therefore decided to leave its interest rate unchanged at 0.25% in November. But it has said that policy could respond in either direction, depending on how inflation and growth prospects develop.
As this story unfolds, the information we gather from our business contacts here in the North East is really important. So I’m particularly pleased that in November and December we were able to host visits to the region from two of the committee’s most senior policymakers – Deputy Governor Ben Broadbent and Chief Economist Andy Haldane. I know Ben and Andy found the insights especially useful – not just from businesses but also a range of charities, community groups and social enterprises. As we look forward in uncertain times, what can we expect from the Bank of England? It is true that our policies alone can’t deliver prosperity. But we can lay the foundations for it by targeting sustainable low inflation.
This should smooth the process during a period of adjustment for the economy, stabilising growth and supporting jobs in the wake of much larger forces.
The outlook for 2017 may be an uncertain one. But I’m confident that the business community in the North East will demonstrate the drive, innovation and perseverance to give it every chance of prospering in the year ahead.
Andrew Hebden is the Bank of England’s Deputy Agent for the North East. @BoENorthEast