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Economic growth forecast revised as investment declines, says ICAEW

16 September 2019. The outlook for economic growth in the UK will depend on the way the UK’s departure from the EU is resolved, according to ICAEW. But in its latest Economic Forecast, published today, ICAEW said while much of the decline in business investment reflects Brexit uncertainty it is also related to some structural shifts in the economy.

In the Q3 Economic Forecast, based on the views of chartered accountants working in every economic sector, ICAEW cut its 2019 growth forecast for the UK economy from 1.5% to 1.1%. It added that output had declined in Q2 2019 for the first time since Q4 2012, caused by manufacturing shutdowns and no-deal Brexit stockpiling in Q1.

Business investment fell by 0.5% in Q2, meaning that companies’ spending on fixed assets had fallen in five of the past six quarters. The jobs market remained relatively resilient, it said, but it also suggested pay growth could have peaked.

But a significant boom in investment was unlikely even with a Brexit deal being struck, the report added, partly because an agreement would not eliminate uncertainty over the future trading relationship with the EU. It was also unlikely because of structural and measurement issues, such as the focus on services rather than manufacturing and the blurring of lines between consumer spending and business investment expenditure.

Michael Izza, Chief Executive of ICAEW, said:

“The weakness of business investment is particularly striking against a backdrop of sluggish economic growth, and reflects Brexit uncertainty. After the 2008 recession business investment recovered, but since 2015 it has stalled and gone into reverse.

“While the overriding priority for the government must be to get a good deal, an investment boom is unlikely even if the UK secures an ‘orderly’ departure from the EU. A withdrawal agreement would not eliminate uncertainty over the future UK-EU trading relationship, and we know structural issues means firms are more likely to spend money on labour than capital. Additionally, an increasingly blurred divide between business and consumer spending – for example, with people buying laptops to work from home – makes measurement more difficult.

“Even when the cloud of Brexit uncertainty lifts, measured growth in capital spending is unlikely to see a dramatic pickup, which would continue a long-running theme that was apparent even before the financial crisis.”

  • Growth in Q2 dragged down by Brexit-related distortions. Q2’s 0.2% drop in output was the first decline since Q4 2012. It reflected an unwinding of the temporary economic boost in Q1 from companies stockpiling against the possibility of a no-deal Brexit, while manufacturing weakness was exacerbated by some car makers bringing their annual summer shutdowns forward to April. Q3 should see some rebound, but we have cut our 2019 growth forecast to 1.1% from 1.5% three months ago. Further ahead, and with different Brexit outcomes having a major bearing on the economy, the growth outlook is highly sensitive to how the UK’s departure from the EU is resolved.
  • Business investment falls back into contractionary territory. The influence of Brexit-related uncertainty was evident in Q2’s 0.5% fall in business investment. This left companies’ spending on fixed assets down in five of the last six quarters, with Q1’s surprise increase probably affected by the introduction of a new accounting standard for companies. A continued lack of clarity over Brexit and evidence from the ICAEW Business Confidence Monitor™ (BCM) and other surveys lead us to think that business investment will continue to decline over the remainder of 2019.
  • Jobs market should remain relatively resilient, while pay growth may have peaked. Although the jobless rate in Q2 ticked up to 3.9% from 3.8% in Q1, this reflected a continued robust expansion in the workforce rather than falling employment. A sluggish economy and the greater difficulty of obtaining workers in a tight jobs market is likely to see employment growth slow, a development which a recent acceleration in pay growth and more expensive workers may contribute to. But with pay numbers flattered by some temporary effects, recent gains may be as good as it gets for now.
  • A Brexit deal may not light up investment. Brexit uncertainty is a likely culprit behind weakness in UK business investment. But structural shifts in the economy alongside issues relating to how investment is measured suggest that even if the UK departs the EU in an orderly manner, a significant revival in measured investment spending may not materialise.

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