As Brexit talks continue, the uncertainty of the UK’s future continues to cause problems for businesses. Michael Saunders of the Bank of England tells Nick Gullon how they are helping.

AS Theresa May and Jeremy Corbyn continue to work together to find a solution to the Brexit deadlock, the message from business remains clear. The uncertainty surrounding the context of the final deal and when Britain’s departure date will be is causing major delays and changes to business investment – just ask workers at Sunderland’s Nissan car factory.

Michael Saunders, member of the Monetary Policy Committee at the Bank of England, has seen for himself the frustrations.

“I try and spend a couple of days each month in different parts of the UK talking to large business and small businesses,” he says.

“Brexit uncertainty has been a big drag on business investment since mid-2016. Since then, it has underperformed compared to every G7 country. The problem is we have missed out on what would have been two or three years of business investment growth.

“Going forward, a lot depends on how Brexit plays out. If, just for sake of argument, we have a smooth transition to an ‘average’ Brexit somewhere between Norway and Canada, that probably wouldn’t be as bad as many businesses fear.

“No-deal Brexit would be off the table, business investment would recover a bit, the economy would continue to grow steadily and the jobless rate would probably fall.”

Michael previously worked as a UK economist at Citigroup for 25 years. He was appointed by the Chancellor of the Exchequer to the Monetary Policy Committee in 2016, just after the referendum, for three years. He has just been appointed for another three years which will see him in post until 2022.

“If we were to have a no-deal Brexit, the economy would probably be weaker, business investment would be lower and the pound would probably fall further which might push up on inflation, and that would be painful.” he says.

“A series of repeated cliff edges could cause investment to be subdued for a while, and would result in business choosing to defer spending. If you think uncertainty is high but will be resolved in a few months, the temptation is for business to wait, and investment will stay sluggish.”

As part of a tour around the North-East, Michael has been speaking to students to ensure they are aware of economic issues, as well as businesses to get “under the lid” of the economy and find out what is happening “away from the figures”.

His role is to set interest rates, in order to keep inflation low, as well as sharing his expertise on the economy so the committee has a mixture of outside experience and direct Bank of England employees.

“Consumer facing businesses are doing okay, not all of them, but in general they are doing okay. Household real income growth has picked up over the last year and consumer spending is not doing too badly.

“Business investment has been weak since the Brexit vote – it has been flat lining - and there has been a lot of business nervousness in the last couple of courses.”

One of the reasons many voters are believed to have turned against the establishment in recent years is they are not benefitting from the apparent economic recovery, and Michael understands that.

“The recovery in jobs has been pretty good but the recovery in living standards has been slow.

“The underlying thing behind that is that the financial crisis caused the collapse in business investment in the UK, investment has been slow to recover, productivity growth has been slow, so real wage growth across last ten years has been low compared to the historic norm of the UK.

“We have the highest rate of employment ever, the lowest unemployment rate in 40 years, but the growth of living standards is pretty dismal so I understand where that dissatisfactions comes from.”

Business may be full of uncertainty, but one thing Michael is sure of is the days of high interest rates are a thing of the past.

“We cut interest rates to support growth and lift the economy out of a rut of high unemployment, weak growth, and interest rates have stayed low because it has taken the economy a long time to recover.

“The jobless rate has fallen remarkably over the last seven years but it is only over the last 18 months that pay growth has picked up in a meaningful way.

“A neutral interest rate is a lot lower than it used to be. In the pre-crisis period a neutral interest rate was about five per cent. Three was low, six was high. A neutral rate now is significantly lower. Without wanting to be too precise, I would guess it is around two per cent, give or take. I’m fairly sure our 0.75 current rate is below neutral, but a return to neutral doesn’t mean to the pre-crisis level.

“I would expect interest rates will go a bit higher over time, but it won’t be far or fast.”