Why business investment rose after the vote for Brexit

Business investment in the UK has grown in the year since the Brexit referendum, according to revised figures that contradict preliminary estimates which found that it had stagnated.

Revisions published last week to Office for National Statistics data have altered the picture of the UK economy, lowering figures for economic growth and increasing the estimate of how much households are saving.

According to the changes, business investment — one of the key indicators of companies’ confidence about the future — was higher than previously thought.

The data are particularly sensitive in the wake of last year’s vote to leave the EU. Mark Carney, governor of the Bank of England, said in August that uncertainty over Brexit was holding back both business investment and household spending.

What do the investment figures now show?

Business investment rose 2.5 per cent during the second quarter of 2017 compared with the same quarter in the previous year. Earlier estimates found it had not grown at all during the 12-month period.

Overall investment spending, known as gross fixed capital formation, was £81.1bn in the second quarter of 2017. Business investment represented £45.7bn of this total. (The overall figure for investment also includes private spending on houses and government investment.)

According to the new data, total investment rose 2.4 per cent and business investment increased 2.5 per cent when compared with the second quarter of 2016, after adjusting for price increases.

Why have the numbers changed?

The data are based on the responses of business to surveys and some companies have been wrongly classifying their investments. Companies had been reporting construction work as capital products.

Correcting this has raised the amount of investment because the different categories require different inflation adjustments. The change in categorisation means that more of the money spent is counted as a real increase in investment rather than an increase in prices.

There are also better data about 2016. New survey responses have led the ONS to reduce its estimate of the amount of investment that year. This reduction means that increases in 2017 now show as bigger percentage growth since the June 23 2016 referendum.

What does this mean for the UK economy?

It does not mean too much for the economy overall. The change in the rate of investment was not enough to raise overall economic growth. In fact, the ONS lowered growth estimates in the year since the Brexit referendum, because consumer spending had not increased as fast as previously thought.

But the data do mean that it is not correct to talk about business investment falling or stagnating, even if investment is continuing to underperform.

When business investment is considered to be rising rapidly, it grows at a year on year rate of about 5 to 10 per cent, which means the growth rate since the Brexit referendum is still very low.

Much of investment spending reflects decisions already made, such as the completion of construction projects that were planned years ago. So a fall in investment intentions after the June 2016 referendum could take a while to show up in official ONS figures.

According to surveys of the construction industry, commercial building work has slowed and the sector is now contracting because new orders are not replacing the ones that have already been finished. Companies say this is due to uncertainty over the future, leading their clients to hold off on making decisions.

Words by Gavin Jackson

Financial Times has the latest UK and international business, finance, economic and political news, comment and analysis.


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