And if you define the “tradable” part of the economy as those sectors with above-average trade shares, “non-tradables” the rest, they behaved broadly as you might expect. Aggregate profits recovered strongly in the early 1990s, as they tend to in the early stage of economic recoveries. But, thanks to a jump in the sterling price of their output, the rise was most marked for firms exposed to international trade (Chart 9). There was plenty of slack in the economy (Chart 10 uses the balances on capacity use from the BCC surveys). Within the tradable sector in particular this allowed for a marked rise in net export volumes. In the three years after ERM exit the UK’s trade balance improved by close to 2% of GDP. Furthermore, despite that spare capacity, business investment too began to accelerate – and again it was the tradable sector whose spending grew fastest (Chart 11).
Though there are plenty of other variables to consider, the negative effects of the depreciation on consumption (via import prices and household income) are expected marginally to outweigh its more positive effects on other parts of demand. If only implicitly the consensus forecast seems to attach more weight to this Brexit-related caution. My guess is that financial markets do so as well. Despite higher profitability, business investment is projected to stagnate or fall this year even as it accelerates significantly further in other developed economies. The more negative effects on consumption clearly predominate and growth of aggregate demand is projected to slow reasonably sharply, to 1.2% by the end of this year. 15  This is the Prime Minister’s phrasing in her speech on 17 January. 13  All speeches are available online at www.bankofengland.co.uk/speeches  13  Yet there are clearly risks to both. If businesses share the view of financial markets, and in particular the foreign exchange market, the risks around EU exit could persuade them to cut investment further this year. If they side more with consumers – who, as we’ve noted before, appear to have taken such uncertainties very much in their stride – they will respond more to today’s favourable conditions than to any caution about the longer-term future and instead raise investment spending.