Falling business investment hurts UK long-term growth potential

Britain’s chances of a robust recovery from the pandemic have been shaken by a much more severe deterioration in business investment over the past six months than in other countries.

Companies cut back on capital spending in the second quarter of the year, official figures show, with more recent data showing little recovery in recent months.

Weak business investment, which since the 2016 Brexit referendum has underperformed both other economies and previous records, bodes ill for the UK’s economic outlook as it restricts growth and the likely future productivity of firms, and hence the ability of employers to pay higher wages.

The continued uncertainty over the UK’s trade relationship with the EU after the Brexit transition ended on December 31 is also weighing on companies’ investment plans.

“Business investment is important for long-term growth,” said Thomas Pugh, UK economist at Capital Economics, a consultancy firm. “Companies that invest more now will be able to produce more in the future. . . and . . . the more machines and better quality a worker has, the more he can produce.

The latest figures highlight the business investment crisis in the UK economy. In the second quarter of 2020, it contracted more than in any other G7 country, falling 26.5%, the largest quarterly decline on record.

This fall was more than double that of France and Germany and more than three times that of the United States.

By comparison, the worst quarterly contraction during the 2008 global recession was 9.6%.

All types of UK business investment fell, with intellectual property and spending on productive buildings and structures contracting at the highest quarterly pace on record.

Investment in information and communication equipment and machinery contracted by almost a third in the second quarter. Businesses have also cut their spending on transportation equipment by almost half.

In the period since June, statistics suggest that while consumers have largely returned to their previous spending habits, businesses were much more reluctant to invest for the future when their finances were under severe strain.

Bar chart of the percentage of UK companies reporting no or less investment due to the pandemic, August 24 to September 6 showing For many companies, Covid-19 meant lower investment

In the latest Office for National Statistics business survey, conducted in the two weeks to September 6, nearly 40% of businesses said they cut or canceled their investment plans during that time.

Large companies, which proportionately make most of the business investment, cut more sharply than average and more than half of the accommodation and restaurant companies surveyed said they were cutting their plans.

Foreign investment has also dried up, according to data from fDi Market, a Financial Times-owned company that tracks cross-border start-up investments.

In the 12 months to July, the number of foreign investment projects fell by 35% compared to the same period a year earlier, the sharpest contraction since the record began in 2003. The decline corresponds to approximately 11,400 fewer jobs created during this period. , including 6,000 fewer jobs in business services.

Now that Covid-19 cases are on the rise again and the government imposes new local and national restrictions on public and business activity, economists fear that investment will continue to suffer more than other sectors of the economy. .

“Uncertainty over the outlook for demand and the risk of a second wave of Covid-19 will ensure business investment does not rebound,” said Samuel Tombs, UK chief economist at consultancy Pantheon Macroeconomics.

Victoria Clarke, economist at wealth management group Investec, added: “A very strong rebound in business investment in the third quarter seems much less likely than it is for consumption.

Part of the concern stems from surveys which suggest UK business executives are extremely cautious about their investment plans.

A Bank of England survey of 2,800 UK company CFOs suggested companies expected their investment levels in spring 2021 to be 12% lower than they would otherwise. the pandemic.

Index line graph, 2016 Q2 = 100 showing Since the Brexit referendum, UK business investment has lagged comparable economies

Brexit has also played a prominent role in investment plans. Since the 2016 EU referendum, the UK has lagged behind the G7 in capital spending.

UK business investment was 27% lower in the second quarter of this year compared to the time of the referendum: this contrasts with investment levels in the US being 5% higher than four years ago, even in the midst of the coronavirus crisis.

Many economists and business leaders fear the UK will continue to lag behind its rivals next year as the economy goes through the aftermath of the end of the Brexit transition period. Dennis Shen, an economist at ScopeRatings, a rating agency, said that even if a trade deal were made, trade frictions would be greater and it would weigh on investment and production growth.

© Phil Noble / Reuters

Milton Guerry, president of the International Federation of Robotics, noted in the federation’s latest annual assessment released last week that the UK had “a surprisingly low robot stock for a country in Western Europe.” He added that even before the pandemic, the uncertainty of Brexit “inhibits[ed] the necessary modernization of production facilities ”, which“ will determine the speed of economic recovery after the pandemic ”.

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