Risk & Economy » Brexit » Brexit uncertainty leads to “most persistent reduction in investment, outside of a recession”

Since the 2016 referendum, private investment in the UK has flatlined which has led to “the most persistent reduction in investment, outside of a recession, on record”, according to research by the Institute of Fiscal Studies (IFS).

The IFS Green Budget 2019 found that between 2012 and the 2016 referendum, UK business investment was generally ahead of the G7 average, in the top quarter of G7 economies. However, since then, the UK has dropped to the bottom of the range.

The report said: “a large gap in business investment growth between the UK and the G7 median opened up in 2018 as investment accelerated across the other members of the G7. Even as global investment growth has since moderated, this gap has persisted.”

“The UK economy is already around £60 billion smaller than it would have been without a vote to leave the European Union, with the UK missing out on a bout of global growth,” said one of the authors of the report, Christian Schulz, Chief UK Economist at Citi. “Business investment is up to 20% lower than it would otherwise have been, hurting productivity and wage growth,” he added.

The graph (above) from the IFS Green Budget shows how prior to the referendum the US, Germany and UK “tracked one another closely” in business investment growth. But, since the vote in June 2016, the UK has begun to flatline and fall behind the other two nations.

The second graph (below) shows how real business investment changed relative to the level observed during the pre-crisis GDP peak. After the initial recession, there is a recovery surpassing the levels of the pre-2008 recession peak. However, the IFS say that the vote to leave the EU “curtailed that nascent recovery”.

 

This has caused an extended period of weak investment, harming the UK’s recovery.

“On average, after previous recessions, investment grew by almost 30% over that period. Even the most anaemic recovery in investment since 1970 (the post-1990 recovery) still saw investment 30% higher than its pre-recession level. In the current recovery, this figure is now just 12%,” the report said.

Uncertainty exacerbates problem

As for why this was happening, the IFS were adamant. “We, like most economists, attribute this significant UK-specific weakness in business investment to Brexit-related uncertainty,” the IFS said.

“The impact of the referendum reflects many of these effects, which have consistently weighed on UK business investment. However, in several respects, Brexit is also an unusual – and particularly economically damaging – source of uncertainty,” the report added.

The report adds that the unusually long duration of the Brexit crisis, coupled with the “severity of its downside risk and how it has been politically managed: there has been a repeated pattern of fixing a date for the uncertainty to resolve, only to prolong it further”, has contributed to a particularly distinctive impact on business investment.

“Continued delay would mean more uncertainty, further denting business investment and leaving growth around just 1% a year, even with a modest fiscal loosening,” said Schultz. “A no-deal Brexit – even with a substantial stimulus – could mean no growth at all for the next two years.

“Remaining in the EU would be the best scenario for economic growth in the next few years,” he added.

Gemma Tetlow, Chief Economist at the Institute for Government and one of the authors of the report added that the government must prioritise properly while this uncertainty continued.

“A general election might break the deadlock in parliament, but Brexit will continue to consume civil servants’ and ministers’ time.

“The government should set clear and limited priorities, avoid frequent ministerial reshuffles, make space for longer-term thinking and be clear about how extra spending or other policies can help deliver its objectives,” Tetlow said.