Measuring the Impact of Brexit on UK Investment, Productivity, Sales and Employment

The Bank of England and HM Treasury are currently working with Nottingham and Stanford Universities to run a pilot survey of firms across the UK on their expectations for future growth of sales, employment, investment, costs and other outcomes. This survey collects expectations from UK firms about the impact of Brexit shocks in a more timely way than other currently available indicators from the ONS, which lag behind events on average by at least 3 months. This proposal seeks to enlarge the panel of firms to allow for greater representativeness of the data, collection of data from the same panel participants over 3 years (we expect further Brexit shocks) and to allow us to conduct detailed analysis of subset of firms by industry, type and region. The data we are collecting is timely and important for immediate policymaking, business decisions and Brexit negotiations. The fact that this project has the full support of the Chief Economists of HM Treasury (Sir David Ramsden) and the Bank (Andrew Haldane) is evidence that the project is timely and important for UK decision making.

This data would be used for three purposes:
A) Research: We would investigate the impact of the Brexit (and other) shocks, in terms of both uncertainty but also mean impacts. Armed with our large panel of at least 2500 firms per month, and after matching this data into annual accounts data from Amadeus, industry and regional data (e.g. LFS and Comtrade) and ONS micro-data, we will then investigate a number of questions. For example, how has Brexit impacted investment and hiring, how does this vary across regions, industries, firm sizes, ages and growth rates? How is this related to the initial enthusiasm for Brexit, and how are other policies affecting this? Are firms expectations consistent with the eventual outcomes (since we follow these firms over time) and what factors appear to influence these expectations? Are firms over-optimistic (too high mean) and over-confident (too high variance) as is often seen in surveys of senior managers? The project will generate important answers to these questions, which will be used to generate international journal publications, as we draw upon unique and timely data during a period of immense change. The basis of the evaluation of the data will be detailed economic analysis using state of the art panel data methods.

B) Policy: The Bank and Treasury are both responding to the Brexit shock with only limited guidance on its impact on the UK economy. Having a minimum panel of 2500 firms at high frequency (monthly) will provide the data that we (and others) can use to explore uncertainty, subjective views of economic conditions and investment, sales and employment impacts by region and industry. We will introduce specialized questions to evaluate policy announcements on Brexit dates, policy positions on trade, immigration and steps to mitigate its impact.

C) Data: Following on prior projects we will rapidly make available public indices of sales, investment, employment and price sentiments (e.g. the size weighted average monthly expected changes, and some lower frequency regional and industry indices). This will be extremely useful for policy makers, but also private firms trying to navigate the Brexit process. Secondly, we will provide on-line anonymized micro-data for business users and academics, and for registered users the full micro-data (confidentially). Our commitment to do this is highlighted by the extensive online provision in prior projects like www.worldmanagementsurvey.com and www.policyuncertainty.com

This project will provide cutting-edge results, both in terms of the academic analysis but also in the service it provides to key policy institutions such as HM Treasury and the Bank of England. This is made possible by the unique data set developed by a trans-Atlantic collaboration of Professors Mizen and Bloom and the specialist inputs of the C-Is in the Bank of England (Thwaites and Young).

The project is intended to assess the ongoing process of exit from the EU following the referendum result on 23 June 2016 by recording monthly data on uncertainty and business decisions about investment, employment and financing. This has evident impact on monetary and fiscal policymaking and on trade and exit negotiations. Brexit is the largest current policy issue and in collecting this survey data we can provide real-time information by region, industry and firm type to the two of the UK's leading policy making institutions (HM Treasury, Bank of England). Their directly support and involvement in this project highlights how this is a critical issue to them.

We have designed the survey to ensure we address key questions of interest to policymakers to maximize the pathways to impact e.g. through the design of special Brexit questions. A letter from Andy Haldane (attached), Chief Economist at the Bank, is sent to potential panel members as part of the recruitment strategy to ensure take up by firms invited to participate in the decision maker panel. The performance of the survey will be regularly reviewed by a steering group with representatives from HMT, Bank and academia.

Senior policy advisors and chief economists at the Bank and HMT will benefit from more timely basic information on firm responses to unfolding events surrounding Brexit. They have indicated that the proposed project is of first order importance in providing this information which cannot be obtained from official sources e.g. ONS due to data collection lags. The proposed survey has the critical advantage of being timely, comprehensive and carefully designed to address the immediate issue at hand. Much existing business information becomes available only with a significant lag or, if it is timely, is based on small, possibly unrepresentative samples. Viewing our firm level responses at an early stage will ensure that policymakers make more informed decisions and it will help better understand the implications of Brexit and so enable appropriate formulation of policy. We have appointed non-academic collaborators to ensure our results follow the designated pathway to impact at the Bank and HMT.

Research: The project will span three research areas and aim to produce top-journal publications:
(A) Uncertainty: this project provide new measures of subjective uncertainty matched to detailed accounts and Census micro-data around the Brexit uncertainty shock. As such it offers a unique combination of uncertainty measurement and identification
(B) Productivity: a key driver of firm and national productivity differences seems to be management practices, one part of which is the forecasting competence of firms. Linking this forecast data to total factor productivity (TFP) microdata will allow us to explore whether, for example, TFP firms are poor at forecasting and coping with shocks and change.
(C) Behavioral: There is a growing literature emphasizing the importance of cognitive biases in generating phenomenon like over-optimism (over high forecasts) and over-confidence (forecasts with too low variance). We can directly test this and see how firm conditions (competition, volatility), education and demographics shape this.

Business: By creating monthly indices of the forecast impact of Brexit on sales, hiring, investment etc we can also help UK firms to better plan for the impact of Brexit on their industry and customers. Our prior work with www.policyuncertainty.com - which has been extensively used (and carried by Bloomberg, Reuters, HAVER, FRED) - shows how valuable businesses find macro data.

Data: This survey will be available in full to any researchers working with Bank or HMT co-authors, or working in the ONS. We will also produce a monthly index and on-line anonymized micro-data to encourage data use, building on the experience of prior data-sharing projects like www.worldmanagementsurvey.com used by many thousands of researchers.