Wednesday, November 21, 2018

Business investment in UK enters worst period since financial crisis

Britain has entered its worst period for business investment since the global financial crisis amid concern that crashing out of the EU will trigger lasting damage for the economy, according to a Guardian analysis of economic news over the past month.

Against a backdrop of heightened uncertainty as Theresa May struggles to secure support for her Brexit plan in parliament, figures published this month reveal that corporate spending on machinery, buildings and research has fallen in three consecutive quarters. That has not happened since the last recession almost a decade ago.

The CBI has blamed uncertainty over Brexit for investment “flooding out” of Britain.

To gauge the impact of the EU referendum outcome on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE 100. Economists made forecasts for seven of those barometers before their release, and in five cases the outcome was worse than expected.

This month there were some bright spots as inflation held steady amid a price war on the high street, while car exports bolstered international trade. Wage growth rose at the fastest pace in almost a decade, although there was a rise in unemployment, according to the latest figures.

MPs are expected to vote on May’s EU withdrawal agreement next month against a backdrop of mainly negative economic developments. Growth is forecast to slow towards the end of the year, with Britain expected to have the slowest growing economy in Europe by 2020.

Writing in the Guardian, David Blanchflower, a former member of the interest rate-setting monetary policy committee (MPC) at the Bank of England, said business would find it hard to invest until there was greater clarity on the future path for the economy.

However, he added: “The forecasts for the UK economy are horrible and most economists are broadly in agreement that Brexit will cause lasting damage.”

The chancellor, Philip Hammond, has called on MPs to vote in favour of May’s Brexit deal to trigger a “deal dividend” for the economy from firms restarting their investments. However, economists have warned that much of the damage since the referendum will be permanent.

Michael Saunders, a member of the MPC, told MPs this week that business investment growth in the UK has lagged behind that in France and Germany. “The withdrawal agreement may give us back some of that, but I suspect quite a lot of that is a permanent loss,” he added.

The latest snapshot for the economy on the Brexit dashboard suggests that economic growth is slowing after a robust summer, when consumer spending rose during warm weather and the World Cup. Retail sales slowed in October, while surveys of business activity revealed weaker levels of growth.

Economists forecast that GDP growth will slow to 0.2% in the final quarter, down from the 0.6% in the previous three months. Business optimism has fallen to the lowest level since 2009, according to a survey from IHS Markit.

The pound dropped on the foreign exchanges after the resignation of Dominic Raab, as Brexit secretary, and Esther McVey, as work and pensions secretary, prompting fears that a no-deal scenario has become more likely, with potentially damaging consequences for the UK economy.

According to the Organisation for Economic Co-operation and Development, a no-deal Brexit could cost more than two percentage points in terms of real GDP over two years, amounting to £40bn.

Writing in the Guardian, Andrew Sentance, another former MPC member, said there was a risk that a much bigger political crisis could develop if May’s deal is rejected in parliament.

“That would trigger a new bout of uncertainty – adversely affecting sterling, consumer spending and business investment,” he said.



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