8 July 2019

Brexit uncertainty means investment is down, but not out


It’s always a little odd when an economic forecast is presented as fact. On Monday,the CBI managed to pull this off with a prediction that UK business investment will fall sharply this year, which the trade body attributed to fears of a ‘no-deal’ Brexit. The Guardian, for example, duly led with “threat of no-deal Brexit causes sharpest investment drop since 2009 recession”.

To be fair, the track record of the CBI’s economics team at least is relatively good, and the underlying narrative is broadly correct. But it is hardly news. We already know that business investment has been sluggish since the vote to leave the EU in 2016. Indeed, it began to level off in 2015 when the legislation to hold a referendum was passed.

What’s more, business investment had already fallen by 1.5 per cent between the first quarter of 2018 and the first quarter of 2019. The CBI’s forecast of 1.3 per cent decline in 2019 is therefore little more than an extrapolation of the weakness over the past year.

Business investment did rise slightly, by 0.4 per cent, in the first quarter compared to the last quarter of 2018. However, this was driven by investment in buildings and structures. The slump in the latest construction PMI suggests that this has not been sustained and the weakness in the PMIs from other sectors confirm that the UK is back in the slow lane. Business investment, therefore, does seem likely to fall in 2019 for the second year running, even though the CBI’s number is on the pessimistic side.

This is consistent with other investment indicators. Foreign Direct Investment (FDI) into the UK has held up relatively well, but this has been flattered by M&A activity and the fall in the pound, which has reduced the cost of UK assets to foreign buyers. Even then, the official FDI data published by the DIT show a fall in the total number of projects. Data tracked by fDi Markets also show that cross-border investments in new physical projects, or expansion of an existing investment which creates new jobs and capital investment, are down more sharply.

So far, so bad. Nonetheless, it is no surprise that the needlessly prolonged and complicated process of Brexit has discouraged investment. Throughout, large parts of government – and the wider establishment – have viewed Brexit as an unwelcome exercise in damage limitation, with little thought to the potential benefits. But there is still plenty of room for disagreement about what all this fear and uncertainty means – or should mean – for the UK’s departure from the EU.

At one extreme, many Remainers conflate Brexit uncertainty with Brexit itself, and conclude that the only way to get investment back again is to stop Brexit. This is wrong at many levels. Cancelling Brexit would presumably require either an early general election or a second referendum, and probably both, prolonging the uncertainty further.

At best, cancelling Brexit would only replace one set of political uncertainties with another. It would surely increase the chances of a Corbyn-led government, which could hit investment even harder. And unless the outcome of another referendum is a clear win (60-40?), one side is still likely to dispute the result, so it may not even be decisive after all.

What’s more, there are good reasons to believe the current weakness in business investment is only temporary. Many surveys show the continued long-term appeal of the UK as a business location. For example, the latest UK Attractiveness Survey (from EY) reports that 15 per cent of investors say they have paused one or more UK projects due to Brexit – note ‘paused’, not cancelled. Similarly, London still dominates other European cities in the Global Financial Centres Index (GFCI).

This supports the idea that investment will rebound once Brexit uncertainty lifts. Of course, this will depend in part on what form the UK’s departure takes, and the long-term relationships that follow. Some other surveys, such as Deloitte’s latest poll of CFOs, do now suggest that confidence in the UK has taken a more lasting hit.

But even if the UK leaves on 31st October without a deal, many businesses would surely prefer the certainty of some short-term disruption for which both sides are now much better prepared, than continued dithering with no idea what will happen next. Leaving sooner rather than later, deal or no deal, would also allow the new team at No.10 to crack on with a broader package of measures to maintain, and enhance, the attractiveness of investment in the UK.

Julian Jessop is an independent economist