ICAEW cuts economic growth forecast as investment falls

Brexit and structural shifts take their toll on ICAEW’s outlook for the UK economy as significant boom in investment remains unlikely even if Brexit deal is agreed.

October 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, ICAEW says that while much of the decline in business investment reflects Brexit uncertainty, it is also related to some structural shifts in the economy.

The news comes in the wake of falling confidence in the London business community. Last month, ICAEW revealed that London was the only region where confidence was lower than in the previous three months.

Harpreet Panesar, ICAEW Regional Director for London and the South East, says: “Businesses have told us that demand is an increasing problem for them. It’s an uncertain time politically and economically, so it could be that consumers and businesses are limiting their expenditure, which is affecting businesses negatively.

We’ve also heard that businesses are finding it hard to recruit and hold on to the staff they need. Businesses can do more to attract skilled staff by ensuring that they are offering attractive options to employees, for example offering employees the chance to train a learn new skills and to progress in their careers.

In the Q3 Economic Forecast, based on the views of chartered accountants working in every economic sector, ICAEW is cutting its 2019 growth forecast for the UK economy from 1.5% to 1.1%. It adds 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 adds, 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.

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,” Michael Izza, Chief Executive of ICAEW, says.

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.

Go to ICAEW Economic Forecast

Liked this? Read these: 

• Property and IT drive down confidence in London 
• London accountants can complete skills gap picture
• Bank’s MPC will closely monitor Brexit inflation