Sunday, December 13, 2020
Now investment prospects go from bad to worse
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

When it comes to Brexit, definitions of what is last minute are pretty flexible. As I write this, we are still waiting to see whether it will be a no deal or the thin deal the two sides have been trying to negotiate. The pendulum has been swinging towards the former, though it is always capable of swinging back.

Brexit has now re-emerged as the main risk to recovery. Figures a few days ago showed that gross domestic product rose by a modest 0.4% in October, its smallest increase since the recovery began in May. That left it 1.9% above its third quarter average, which would normally be a good basis for growth in the current quarter.

Since then, however, we have had the November lockdown. It was always the case that its impact would be small compared with the March-April lockdown. Professor Costas Milas of Liverpool University notes, in addition, that data on the UK-wide stringency of restrictions, from the Blavatnik School of Government at Oxford and others suggests that last month was not that much different in terms of restrictions than October.

To that can be added the fact that some economic activity has been stepped up in anticipation of Brexit. UK exporters have been getting their products into the EU and vice versa, hence some of the damaging congestion at ports.

Netting all this out, the economy may suffer only a small setback this quarter, if it
does so at all. Brexit, though, represents a significant risk in the early months of next year, when it is likely to be combined with further post-Christmas Covid restrictions. The sunlit uplands provided by coronavirus vaccines will still be there, but probably not until the spring.

Even when we get into the sunshine, though, it is unlikely to shine on business investment. A strong investment revival still seems like a distant prospect. The EU referendum in June 2016 killed off a decent recovery in business investment, leaving it 20% below what it would otherwise have been on the eve of the pandemic, according to the Bank of England, since which time the situation has gone from bad to worse.

The Office for Budget Responsibility (OBR), the official forecaster, predicts that after a pandemic-related 18.1% fall in business investment this year, next year’s “recovery” will be a mere 1.2%. That compares with figures of 15.1% and 7.5% for consumer spending. Consumers will get their mojo back a long time before businesses do, it thinks. Only in 2022 will there be a reasonable pick-up in business investment, the OBR suggests. It will, however, take until 2023 before business investment gets back to depressed 2019 levels, and that is on the assumption of a smooth Brexit.

This is even with the incentive, which should be very important for small and medium-sized firms, of a £1m annual investment allowance, a temporary measure which has been extended by the Treasury until the beginning of 2022.

The OECD, which recently released an updated global economic outlook, is even more downbeat about UK business investment, warning that “feeble investment” will weigh on the recovery and that “business investment will remain weak due to spare capacity and continued uncertainty”. Business investment next year will be running at 80% of pre-Covid levels, it says, and warns of “high risks of rising trade barriers, reduced labour mobility and lower foreign direct investment”, particularly in the context of leaving the EU without a deal.

Foreign investment is important for the UK, and crucial to productivity. Surveys and official figures show that foreign-owned firms have consistently higher productivity than their domestic counterparts, for a variety of reasons. Now, however, a lot of chickens are coming home to roost.

Brexit has made it a struggle to hold on to the existing foreign direct investment in Britain, some of which was made with the explicit aim of accessing the EU single market. Some of this investment was key to Margaret Thatcher’s remaking of the economy in the 1980s, which was why she was so enthusiastic about the single market. Attracting new foreign investment in the context of the UK’s new trading arrangements with the EU will be even harder, and I feel sorry for those who are asked with trying to do so, as some of us warned repeatedly in the run-up to the referendum.

It all comes back to productivity, the fundamental driver of prosperity and living standards. Some hope that the coronavirus crisis will have provided the “creative destruction”, the expression of the economist Joseph Schumpeter and provide the basis for a sustained productivity revival and string and sustained long run growth.

For this to happen, however, you need not just the destruction of old and inefficient firms going out of business, but also the phoenixes rising from the ashes, buoyed by the “animal spirits” of another great and, in his own words, defunct economist, John Maynard Keynes.

Those animal spirits are, however, lacking. Business investment traditionally leads the cycle, as firms spot new opportunities and look to exploit them, rather than lags it badly, as now.

A combination of weak business investment and stagnant productivity is an unhappy one. Britain’s businesses should be able to do a lot better than that. But when they have to deal with the destructive actions of politicians, it is hard.