UK business investment falls as Brexit uncertainty strikes UK firms

The Office for National Statistics judges that investment by companies fell by 0.7 per cent in the three months to June, following a contraction of 0.5 per cent in the first quarter

Ben Chu
Economics Editor
Friday 28 September 2018 10:42
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Governor of the Bank of England Mark Carney expects investment to pick up next year as Brexit uncertainty lessens

Business investment fell again in the second quarter of 2018, suggesting that uncertainty over Brexit is hitting firms’ spending.

The Office for National Statistics (ONS) estimated on Friday that investment by companies fell by 0.7 per cent in the three months to June, following a contraction of 0.5 per cent in the first quarter.

The data follows a finding by the Bank of England’s network of regional agents that firms are putting investment on hold, or diverting it abroad, due to fears about new trade frictions with the European Union.

However, the Bank’s governor Mark Carney has also said that investment by firms could pick up strongly if political progress is made towards a withdrawal deal with the EU.

Overall GDP growth was judged by the ONS to have been 0.4 per cent in the second quarter.

But its estimate for growth in the first quarter was cut from 0.2 per cent to 0.1 per cent.

The agency said this downgrade was due to a more accurate view of the performance of the construction sector based on VAT receipts.

Builders were severely hit by the Beast from the East snowstorms in February and March.

The annual GDP growth rate for Q2 has been revised down from 1.3 per cent to 1.2 per cent.

-1.7%

The latest official estimate of the fall in construction output in Q1

Thanks to the Q1 revision, the ONS said growth in the first half of 2018 was the weakest since the second half of 2011.

“Although it has picked up a little from a slow start to the year, underlying economic growth remains persistently below the long-term average,” said Rob Kent-Smith of the ONS.

“The latest business investment data shows growth weakening for the fourth quarter in a row.”

The ONS now estimates that construction output plunged by 1.7 per cent in the first quarter, before recovering by 0.8 per cent in the second quarter.

It sees manufacturing output contracting by 0.7 per cent in the second quarter, after falling 0.1 per cent in the first three months.

However, services growth in the second quarter is seen as picking up to 0.6 per cent, from 0.3 per cent previously.

Squeezed by Brexit uncertainty

The ONS also reported that the UK current account deficit widened to 3.9 per cent in the second quarter, as export values fell by 0.1 per cent and imports grew by 1.6 per cent.

Net trade was a drag on growth for the second successive quarter, despite hopes that the fall in sterling would support manufacturing exports.

GDP per capita grew by 0.2 per cent in the second quarter, after falling 0.1 per cent in the first.

The aggregate saving ratio of the household sector was up slightly to 3.9 per cent, but still close to a record low.

Once household investment spending is included, the sector was a net borrower for the seventh consecutive quarter.

Some economists have warned that such a low saving ratio may not be sustainable.

The Bank of England in August forecast GDP growth of 1.4 per cent in 2018, down from 1.7 per cent last year.

It expects a pickup to 1.8 per cent in 2019, although this is predicated on a “smooth” Brexit.

But sterling has been under pressure in recent weeks as progress towards an agreement with the EU has stalled and the prime minister’s Chequers plan was rejected by EU leaders in Salzburg earlier this month.

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