There is an alarming decline in business investment in the United Kingdom

Posted July 1, 2022, 7:01 am

While the specific economic effects of Brexit are still debatable, there is one indicator that has clearly taken a shock from leaving the European Union. This is an investment in business. Data published on Thursday by Britain’s Office for National Statistics (ONS) confirmed a further fall of 0.6% in the first quarter of 2021. The UK is still far from returning to pre-pandemic levels, with business investment 9.2% lower than it was in the fourth quarter of 2019.

“This is clearly an underperformance of the UK economy compared to the rest of the G7 and growth prospects are not favourable. A lot of people have the word ‘recession’ on their lips,” says Brian Hilliard, an economist at Société Générale, for whom “it’s reasonable to think that this weakness is Brexit-related.”

Deficit of 58 bln

The curve of business investment over the past ten years is eloquent. It grew until the referendum in June 2016, then stagnated for several years before experiencing a soft spot due to the pandemic. Simon French, managing director of Panmure Gordon, estimates a shortfall in British investment of £58bn. “We extrapolated this figure taking into account the Brexit trend and the evolution of business investment in the United States and the EU,” he explains.

Uncertainty is the number one factor that hinders investment decisions. “The industry has had a lot of ups and downs,” said Seamus Nevis, economist at Make UK, which represents the industry. Companies stockpiled because of the “no deal” threat, then came the pandemic. Their investment resources have been exhausted. »

Clarify the horizon

A trade deal signed at the end of December with the EU was supposed to clear the horizon for manufacturers, but then came Covid to add to the difficulties. In a note, Oxford Economics analysts note that it is the sectors most affected by the pandemic that are slowing down investment.

This applies to the hotel industry and the field of public catering, which lags behind the previous level by 35%, as well as transport, which has fallen by 47%. This figure reflects both the situation in aeronautics, which has suffered from a drop in demand, and the automotive industry, burdened by a shortage of semiconductors.

During a House of Commons hearing, Andrew Bailey, governor of the Bank of England, cited logistical disruptions as one of the reasons why companies are delaying investment. Not to mention that the war in Ukraine has created a new source of uncertainty. “There is a well-established relationship between uncertainty and investment,” he said.

The role of labor shortage

Labor shortages may also play a role in this investment weakness, he says: “The proportion of companies that say they are not investing because of labor shortages is extremely high. »

For the British government, the slowness is all the more disappointing as it created an exceptional two-year depreciation in April 2021 to revive investment. But with no results, the Treasury recently launched a consultation on replacing the tool. The CBI, the main employers’ federation, is calling for this tax advantage to be made permanent. “The window to avoid recession is narrow. Inaction this summer will lead us to stagnation in 2023,” she warned.