To understand the Bank's decision it is important to look at what has changed since the last meeting. Theresa May resigned, which kicked off the leadership contest for the next Conservative leader and therefore the next PM. With just under five months to go until the October deadline, the probability of a ‘No Deal’ has increased to 40% (BNP Paribas).
Another significant development has been the intensification of world trade fears, which has affected the manufacturing sector. The latest manufacturing PMI fell below 50 for the first time since July 2016 – the month that followed the EU Referendum vote. Demand has certainly tapered off due to the on-going global trade tensions but also due to businesses beginning to unwind the inventories built up before the original Brexit date which fell in March.
Aside from the bleak performance shown by the manufacturing sector, other data is holding up better. The services PMI picked up in May to 51 compared to 50.4 in the previous month. Despite this, collectively the overall PMI index points to stagnation in the second quarter for the UK economy.
With employment at record levels there are concerns that this is not pushing further growth in wages. UK wage growth certainly exceeded expectations in April, with regular pay rising 3.4%. Despite this, inflation is currently at the Bank’s target of 2%. The Bank believes that this will start to feed through to inflation pressures over the medium term. However, recent research by a campaign group - the Living Wage Foundation argue headline statistics are masking the true story. Although unemployment is back to pre-crisis levels more people are “underemployed” i.e. in temporary or part time roles.
Wage growth has also been held back by low productivity. Higher productivity means higher wages as businesses benefit from higher revenues with fewer resources. Latest figures show UK labour productivity grew by 0.3% in Q4 2018 compared to the previous quarter. It is worth noting the UK is not alone in suffering from weak productivity growth.
Brexit uncertainty continues to hamper business investment therefore future productivity gains are likely to remain muted, especially until there is more clarity. Businesses are reluctant to commit to spending preferring to hire workers instead.
An additional layer of political uncertainty has now been added to current Brexit negotiations. This will increase the cautiousness amongst investors. Nonetheless, there are some companies that are looking past the Brexit turmoil and committing to the UK, in particular London. One notable example is Citigroup, which bought its headquarters for a reported £1.1bn. In addition, the widening of the spread between all property and the 10-year government bond yield means there is still value in the real estate market.
Focussing on the office sector, businesses have opted to expand headcount rather than invest. As a result occupiers have been increasing work space. Initial estimates for H1 suggest take-up levels are close to the long term average. The stockpiling effect seen in the recent GDP figures has partially driven some of the recent industrial and logistics out-performance however the sector also continues to benefit from the structural changes that are occurring. Growth of online shopping will drive demand for warehouse space. For the eighth consecutive month turnover in physical stores has declined. Prospects for the retail sector look challenging exacerbated by soft wage growth.