Home Business NewsEconomic News Long-term business investment set to shrink on back of Brexit uncertainty

Long-term business investment set to shrink on back of Brexit uncertainty

17th Mar 17 10:04 am


The Prime Minister’s intention to trigger Article 50 by the end of March has created uncertainty for businesses who are being much more cautious about future spending plans until the impact Brexit negotiations will have on the UK economy becomes clear. With business investment set to shrink by 1.9 per cent in 2017, following the 1 per cent quarter-on-quarter fall seen in Q4 2016, the recent rush for growth among businesses who expect high profits based on price increases is only sustainable in the short-term.

·        ICAEW’s forecast for economic growth in 2017 is 0.4 per cent less than that reported for Q4 2016 and now sits at 1.6 per cent. The pace of economic growth in the UK looks set to have slowed in the first quarter of 2017, as rising inflation puts a dampener on the rate of consumer spending growth. GDP growth in 2017 is modestly slower than the past few years but signs point to a possibly more balanced growth for the year as a whole.

·        Business investment will contract by 1.9 per cent in 2017, following the 1 per cent quarter-on-quarter fall reported in Q4 2016. Although our Business Confidence Monitor (BCM) for Q1 2017 highlighted a rush to grow among businesses, a fall in business investment indicates that businesses are not investing in their long-term growth.

·        Easing but still relatively robust labour market. The UK labour market remains historically strong, with the employment rate reaching a record high in Q4 2016, and unemployment remaining below 5 per cent. ICAEW expects private sector employment to rise by just 0.6 per cent (versus 1.4 per cent in 2016), however this should be enough to ensure the labour market remains relatively tight by the standards of recent years in 2017.

·        Falling real wages for the first time since 2013. Inflation reached 1.8 per cent in the year to January 2017, and the peak in price growth is not likely to be reached until the final months of this year. Businesses’ expectations are for wage growth to slow modestly – in line with a weaker outlook for job creation. Together, these two developments mean wages will fall in real terms for the first time since 2013, resulting in a squeeze on household spending.

Stephen Ibbotson, ICAEW Director of Business, said: “The Chancellor’s Spring Budget was something of a missed opportunity, with no solid stimulus announced to drive growth during a time when nobody is really certain what the financial impact of triggering Article 50 will look like. It appears Philip Hammond has opted to defer larger economic policy announcements until the autumn, which does not help businesses who are currently experiencing low confidence due to a lack of uncertainty about their role in a post-Brexit landscape.”

“It’s important to remember that ensuring the UK is match fit for Brexit is a marathon, not a sprint, and so more focus should be placed on long-term projects that drive productivity and enable businesses to flourish within a landscape that is yet to be explored. Although beneficial exchange rates are helping businesses to trade internationally currently, the Government export target needs to be more realistic. This rush to grow phenomenon that we are currently seeing among businesses who are holding on to their British bulldog spirit is unsustainable in the long-term. It is, therefore, the Government’s obligation to provide funding, incentives, and support that will enable businesses to take advantage of global opportunities once Brexit negotiations have begun.”

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