Business investment set to slow as uncertainty around Brexit persists

The pace of capital investment has fallen in 2017 and is forecast to slow even further in 2018 according to the latest ICAEW Economic Forecast. Business investment is forecast to be 2.1% this year, the second weakest since the global financial crisis. As companies continue to ‘wait and see’ what kind of post-Brexit settlement is achieved, ICAEW forecasts investment growth of just 1.5% in 2018.

ICAEW has also lowered its forecast for GDP growth in 2017 to 1.5% though expects a marginal improvement in 2018 with growth of 1.6%, despite a weaker pound at last starting to help both businesses who export and manufacture.

Michael Izza, ICAEW Chief Executive, said “Businesses are responding to uncertainty around Brexit and the lack of progress on a trade deal and transition arrangements by building up their cash balances rather than investing in the UK’s future. The events of this week have not helped and there is an increasing risk that the only investment businesses will make is in triggering contingency plans.

“With corporate cash balances still very high and interest rates near all-time lows, businesses are clearly able to invest given the right economic and political outlook. So, if the government were to deliver greater clarity over future trading opportunities, businesses could well be convinced to accelerate their spending. That means moving quickly to the second phase of the negotiations with the European Union but more importantly, agreeing on a transition deal early in the new year.”

The ICAEW Economic Forecast for Q4 2017 reveals:

• Forecast GDP growth of 1.5% in 2017 and 1.6% in 2018. Recent data suggests the squeeze on consumers has continued, while manufacturing and exports have provided only a  modest spur to activity. With these trends set to continue in 2018, and little movement in fiscal or monetary policy, GDP growth will remain sluggish.
• Productivity constrained by weak investment intentions. Output per hour grew in Q3 2017 at the fastest rate since 2011, but this was entirely driven by a reduction in the hours worked, rather than an improvement in productivity. Measures set out in the Autumn Statement could yield longer-term productivity gains, but the ongoing uncertainty over Brexit will constrain business investment again in 2018.
• Slower jobs growth means unemployment rate stabilises. After a solid first half of 2017, the rate of job creation slowed markedly in the third quarter, with total employment down. We think the private sector can continue to create jobs in 2018 but at a slower rate and constrained by shortages of skilled labour in some sectors. Slow wage growth will continue in the year ahead.
• Weaker pound helping manufacturers. After a few quarters when a weaker currency seemed only to bring higher costs to manufacturing and exporting businesses, recent months have seen input cost pressures starting to ease and competitiveness improving. The ICAEW Business Confidence Monitor™ (BCM) evidence suggests an expansion in export growth for manufacturers in 2018.

Michael Izza adds: “The UK needs to be able to compete effectively in the global economy, especially when we leave the EU. Exports are starting to grow and we’re beginning to see some signs of rebalancing within the economy. But without accelerated investment in skills, training and technology coupled with an increase in businesses exporting, we remain concerned about the medium and long term outlook.”