Commercial property market flagged as danger area for the local economy
Bank of England agent Phil Eckersley talks exclusively to The Times
Prominent business leaders from across Kent gathered in Tunbridge Wells on Thursday to listen to one of the Bank of England’s most senior agents on where he believes the UK economy is heading and the central bank’s next move.
Phil Eckersley, who has been the Bank of England’s agent in the south east and East Anglia since 2008, was speaking at an event hosted by the Muesli Mafia business network at the Royal Wells Hotel, in an off-the-record capacity.
However, in an exclusive interview with the Times prior to the event, Mr Eckersley gave his thoughts on what is in store for the post-referendum economy.
When asked about the possibility of negative interest rates, he explained that the Monetary Policy Committee (MPC) is clear that they see the effective lower bound as a positive number.
His comments – which reflect his own opinion – come shortly after the Bank of England announced on August 4 that it would be cutting interest rates to the lowest level in its history, – 0.25 per cent – alongside a raft of other measures to stimulate the post-Brexit economy.
“We are entering what is likely to be a period of significant change for our economy, with the vote to leave the European Union ushering in a new era for the UK’s relationship with the rest of the world. Some of the adjustments to this new reality may prove difficult and many will take time.”
And, while the Bank of England firmly believes that the UK – one of the most flexible economies in the world – can handle this change, there will inevitably be a period of heightened uncertainty as this process takes place.
But although the bank is predicting a slowdown in the economy and a rise in unemployment, Mr Eckersley said the economy would have to deteriorate considerably before the MPC changed its views on negative rates.
“When looking at other countries it is also not clear if taking this route has been successful. What we have seen in some jurisdictions is that banks do not pass on the cuts and have even raised rates.”
He added that the Governor of the Bank of England, Mark Carney, has commented that he is ‘not a particular fan’ of negative rates, although he could be outvoted by members of the MPC on the issue.
However, for now the central bank will wait to see the effect of the introduction of a package of measures designed to support the UK economy.
The good news is that simply announcing the policy has had a positive impact on confidence, and has already reduced borrowing costs in certain channels.
“Market expectations are that the bank rate will stay low for a while,” Mr Eckersley said, with only ‘very gradual’ increases expected in the future.
“For the last six years the markets have been expecting rates to go up in the coming months. But as economic news over the period unfolded their expectations have not materialised – starting with their inability to predict the depth of the downturn immediately post crisis, followed by the Euro Area crisis, then broader concerns about the global economy, and more recently the potential impact of Brexit,” he said.
When asked about specific concerns, Mr Eckersley said he believes one of the danger areas for the economy is the commercial real estate market (CRE).
The sector was already showing signs of ‘vulnerability’, even before the referendum, but the result appears to have affected the market in a particularly negative way.
“Existing weaknesses persisted in the retail market before the referendum, reflecting the changing shopping habits of UK consumers,” he explained.
“This has resulted in a rise in voids in many town centres in the south east, in particular in coastal areas.
Furthermore, investor and occupier demand for industrial space has been weakening as participants face a more uncertain future.
“London and the south east are particularly vulnerable, given their significant share of the CRE market.
“The bank also remains concerned about the residential property market, especially in London and the south east, where the market has shown signs of overheating in the past.
“However, in the bank’s latest Inflation Report, published post the referendum, house prices are projected to decline a little over the near term, while the level of transactions remains broadly flat, reflecting greater uncertainty associated with the referendum outcome.”
Mr Eckersley pointed out that cooling house prices can have a knock-on effect on consumer sentiment, while less activity can also directly affect other areas of the economy, such as the retailers of white and brown goods, kitchens, carpets, home furnishings, etc.
He gave the labour market as a further example of an area which could be negatively impacted by the referendum result, particularly agriculture if the recruitment of seasonal labour is limited by scrapping the free movement of people.
Looking to the future, Mr Eckersley believes there are a number of uncertainties and that if the downside risks materialise a recession ‘is possible’. But this is not the bank’s central forecast, which assumes growth will moderate in the near term, picking up a little in 2017 and 2018.
He added that the point of the latest action taken by the central bank was to ensure a recession was avoided, although unemployment is still expected to hit 5.5 per cent next year.
He also warned of ‘big downside risks’, such as further declines in already weak business investment, which he said was often the first thing companies cut back on in times of uncertainty.
“The problem is if everyone cuts back at the same time it may engender a downturn,” he explained.
For now, Mr Eckersley believes the Bank of England will monitor the economy closely to see if growth remains positive.
“The good thing about monetary policy is it is nimble and can be implemented quickly, but it can’t do all the heavy lifting itself.
“The transition [towards a post-Brexit economy] won’t necessarily be smooth; there are some dangers and maybe further downsides. “But we shouldn’t be too pessimistic.”
WHAT DOES AN AGENT DO?
As an agent for the Bank of England, Mr Eckersley is tasked with liaising with around 50 to 60 businesses per month throughout the south east and East Anglia.
When meeting each company – which range from supermarket giants headquartered in his patch – such as Tesco – to localised retail chains, manufacturers and agricultural firms, he collects data on a variety of metrics.
These include revenue streams, investment (both recent and planned), hiring intentions and pay expectations, as well as general sentiment. His findings are then relayed to the Bank of England’s Monetary Policy Committee two days before their monthly meeting to determine policy – partially on the basis of the agents’ findings.
AT THE MUESLI MAFIA
Phil Eckersley presented the Bank of England’s views of the current state of the economy at a breakfast briefing on August 18 at The Royal Wells Hotel in front of dozens of members of the Muesli Mafia – one of Kent’s best known business networking organisations.
Over the past eight years Mr Eckersley has given a number of presentations to the ‘mafia’ in Tunbridge Wells, Maidstone and Bromley.
He said: “I always look forward to briefing the audience at these events as the atmosphere is conducive to a lively exchange of views.
“The questions are thought provoking and I always come away with a wealth of soundings from participants that provide an opportunity to reconsider our thinking.”