Andrew Bailey: The future for business investment in the age of
Covid and the role of financial services
Speech by Mr Andrew Bailey, Governor of the Bank of England, at TheCityUK National
Conference, virtual event, 17 November 2020.
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Introduction
Thank you for inviting me to participate in TheCityUK National Conference. I want to emphasise
the importance of the role of TheCityUK and the relationship with the Bank of England. This year,
perhaps more than ever, we have drawn on the relationship to exchange views at times of great
stress and challenge for the country as a whole.
Let me start if you don't mind with an anecdote which may provide some light relief in these
times. Twenty-odd years ago, I was the Governor's Private Secretary. At the time, there was a
need to preserve and revive one of TheCityUK's predecessors, British Invisibles. The Governor
of the day, Eddie George, was involved, and asked Douglas Hurd, previously Foreign Secretary,
to conduct a review. The Governor decided to visit Douglas Hurd at his office, in NatWest in
Bishopsgate, to discuss the review. We drove there - it's not far I know. We pulled up outside a
NatWest in heavy traffic. The Governor was on the kerbside, his private secretary was not and
had to get out and avoid being run over. The Governor was into the NatWest first. Unfortunately, it
was the wrong NatWest - it was a branch. I got into the branch to hear the Governor announce
to a cashier that he was the Governor of the Bank of England and he had come to see Douglas
Hurd. She gave him a look and said: "You're winding me up mate". We retreated. Fortunately, we
found Douglas Hurd, the review was done, and the lineage can be traced to TheCityUK today.
The future for business investment
Onto the serious stuff - I want to talk about the future for business investment in the age of Covid
and the role of financial services. A bit of recent history to start with: since the global financial
crisis, business investment in the UK has been weaker than in previous expansions, and
investment growth has been unusually weak relative to employment. It's the story of weak
productivity growth.
Globally, there is a well-established story of an excess supply of saving relative to investment
opportunity, which underpins the pretty much consensus view that so-called neutral interest
rates - the equilibrium rate - will stay low for the foreseeable future.
But, let's stop for a moment on the issue of lack of investment opportunity. There are several
strands to this story. I am going to touch on one that is certainly relevant to the UK situation.
Economic theory indicates that heightened uncertainty about the future tends to have a negative
effect on investment, it increases the attraction of waiting to see how the uncertainty is resolved.
Both Covid and the process of setting the future relationship with the EU have increased
uncertainty - we see this in surveys - and this has restrained investment. Now, I say this to be
clear not in the sense of passing any judgement on Brexit - as a public official I take no position
on that, and nor do I pass any judgement on the handling of Covid - that is not the point. Our job
at the Bank of England is to call it as we see it. So, yes, uncertainty does reduce investment. As
we said in our recent Monetary Policy Report, business expectations for sales next year remain
subdued as do measures of investment intentions.
Since we published our report, we have had encouraging news on the vaccine front. Of course
there is a lot to do, and important steps to take and evidence to gather, but this is a big step
forward, and it will play a major role in lowering the level of uncertainty. So let me thank those in
businesses, universities, government and the NHS who are pushing this vital work forward at
such impressive speed.
If we can now see some light at the end of the tunnel, we need to focus more on important
questions about how our economies will look in the future, how we want them to look, what will
be the legacy of Covid, and what we can do to support and prioritise any necessary more
structural changes.
Economics can be a dismal affair as we know, and as befits that, we tend to talk in unfortunate
terms about "scarring" to the economy. We tried to refocus that approach a bit in our recent
Monetary Policy Report, and instead look at how the structure of the economy may change in the
future. We described it in terms of three potential components of the change: how what we buy
has changed and the way we buy it; how the way we work has changed; and how what we make
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may need to change.
If these changes persist, they could require a reallocation of labour and capital, and this
reallocation could be more or less costly. Now, none of us have good answers yet to how much
these changes will persist, or even increase. But my best guess is that there will be lasting
changes - and we can draw on evidence from history to support this view. I will add two further
views, one is that we may see a reversal of the period of low productivity growth. Covid may be
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the spur - the change agent if you like. Second, we must now focus and push ahead hard with
the changes necessary to support changing the direction of our climate. All of this will require
investment on a much larger scale than we have seen in recent years, and that investment will
need to be financed.
Before I go on to the issue of financing, I want to elaborate a bit on the issue of scarring. I'm not a
pessimist on the likely degree or consequences of structural change. I am not a believer in an
overly literal read from history. We saw deep and painful structural change in the economy in the
1980s and into the 1990s, with a transition from heavy industry and mining to a more services
oriented economy. That was a much more painful process, with very difficult consequences,
including a sharp increase in economic inequality.I don't believe that Covid will lead to the sort of
inter-sectoral change that we saw in the 1980s and 90s. It is more likely to be a case of
intrasectoral change, for instance within services. Such a disruption can, of course, increase the
mismatch of employment between firms and occupations, but we have a labour market that has
shown the capacity to adjust relatively quickly to such changes. Intra-sectoral change may also
increase the likelihood that more capital can be redeployed, and more rapidly. But the prevailing
level of uncertainty means there is no cause to be complacent here - and you should expect a
central bank to remain cautious.
The supply of finance for productive investment
Let me turn now to the financing of investment. As I said earlier, we live in a time where there
appears to be no shortage of aggregate saving, but investment is weak. Indeed, the aggregate
saving rate in the UK has gone up markedly this year as the opportunity to spend has fallen but
incomes have, on average, been supported, though we are far from certain to what extent this
higher saving level will persist. There is also a role for monetary policy here. As well as
maintaining interest rates which are consistent with achieving the inflation target, in my view
Quantitative Easing at a time like this can prevent an unwarranted tightening in financial
conditions, such as the tightening we observed in late March this year. To be clear, that is not
monetary financing or fiscal dominance. It is instead the support of private finance, via a
wellfunctioning financial system, for the economy and thus for consumption and investment.
Investment has to be financed. Covid has been a major shock to companies. In our August
Financial Stability Report the Bank's Financial Policy Committee assessed that UK companies
could face a cash flow deficit in the current financial year of up to around £200bn as well as
having to potentially refinance around £275bn of debt maturing over the coming year.
It's not all dismal news though. Since the onset of the Covid shock, UK companies have raised a
large amount of external finance, providing them with liquidity to help bridge the disruption. The
UK financial system is playing a key role in helping companies manage the impact of the shock.
A decade or more on, the financial system is supporting the economy, not the other way around,
and that is how it should be. This has been possible due to the resilience that was built up
following the global financial crisis, and the extraordinary policy response of the Government, and
if you don't mind me saying so, the Bank of England. But that is not the end of the story. More
financing will be needed to ensure viable businesses survive, and to finance the need for
investment. And, we need to ensure that this is done without excessive leverage. While the
current low level of interest rates supports the sustainability of UK corporate debt, higher
leverage would make the corporate sector more vulnerable to interest rate or earnings shocks.
So, what are we doing about this? At the Bank, we are emphasising work on the supply of
finance for productive investment, which is important for long-term growth and for financial
stability. In 2016 the Treasury included in the FPC's annual remit letter that it should consider,
subject to meeting its primary objectives in relation to financial stability, how the UK financial
system might best be able to intermediate the supply of finance for productive investment. This
year, the Treasury recommended that the FPC consider how financial regulation and changes to
the financial system's structure may have affected the balance between financial stability and the
support of productive finance in all regions and nations of the UK. This is very welcome, and I
can assure you that we are on the case.
We set out our current work in the August Financial Stability Report - with a focus on why DC
pension funds in the UK invest only a small proportion of their assets in less liquid investments;
reviewing whether aspects of our prudential regulatory framework create disincentives to
investing in longer-term and less liquid investments and could be removed without reducing the
safety and soundness of banks and insurers, or policyholder protection; and how investment
fund structures can safely support necessary investment in certain illiquid assets.
To conclude, this agenda is crucial and will have our strong focus. It marries the modern
functions of the Bank with some of its best traditions. But, of course, it requires major
commitment from the financial services industry, to support the economy, businesses and the
people of this country as we get back on our feet from the effects of Covid and transform the
economy to support climate change. Fortunately, I know from many conversations that
TheCityUK are up for the challenge.
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Thank you
1
You do not need to appeal to permanent structural change to be worried about scarring. Even if there were no
change to the structure of the economy, you can still get persistent damage from uncertainty / unemployment /
capital scrapping.
2
Whilst COVID might open up the possibilities of new business models, products and ways of working, more
productivity growth doesn't come out of nothing. It needs physical investment and, increasingly, investment in
"intangible" capital, such as software, data, R&D, training and new business processes.