Want to see the economic damage already done by Brexit? Look to lost business investment

The economic debate over Brexit has rumbled on ever since the referendum. For some, employment levels have never been higher—so why worry? For any impartial onlooker though damage has already been done. Indeed the most worrying facet of the experience since 2016 has been the lacklustre investment performance by the business sector, which if not reversed will consign the UK to years of low growth and poor competitiveness in a world already struggling with trade disputes and fears of oncoming global recession. 

We all remember the criticism of “project fear” during the referendum. The Remain campaign's argument was that Brexit was bad for the UK economy—and a no-deal Brexit, or the “WTO option” as it was referred to by then, the worst of all. While this was dismissed by Leavers who eventually won the vote, the predictions had at their heart the negative impact on domestic and foreign investment—and hence the overall economy—that a Leave vote might engender. 

Sadly this is evident already, despite the fact that we have not left yet. The Centre for European Reform, the Bank of England and others have estimated that by late 2018 the economy had already suffered lost growth of over 2 per cent compared to how it would have performed. Given the further slowdown in the economy since, the figure now is likely to be nearer 3 per cent. In other words we would have been some 3 per cent richer as a nation, more innovative and more competitive.

Why? Because the main hit has indeed been to investment, which is essential for innovation and growth. Although we have record low unemployment, this is largely because firms have done the cautious, prudent thing. In the middle of the huge economic and political uncertainty that the planned departure from the EU has created, they have adopted the strategy of meeting whatever demand there is by hiring more workers, who are relatively cheap (and can be fired if need be), instead of investing as they otherwise would have done in plants, machinery, operations and systems.

Private sector capital spending fell by 0.2 per cent in 2016 and although it recovered by 1.5 per cent in 2017, as world trade growth picked up and a soft Brexit seemed to be on the cards, that was all reversed as prospects for a benign deal diminished. Business confidence slumped and 2018 saw a fall in investment in each quarter, and a significant drop over the year as a whole. Early this year, as the original deadline of 29^th March for leaving the EU loomed, production, investment and general stockpiling pushed GDP up in the first quarter. But the falling trend resumed in the second quarter. As destocking followed, GDP contracted, with business investment down 0.5 per cent, a decline of 1.6 per cent year-on-year. There were falls in investment in buildings, communications equipment, plants and machinery.

Surveys suggest that the mood among firms remains a negative one, particularly for smaller firms which will probably find the earlier stock building and then destocking effort too expensive to repeat again as the new 31^st October deadline approaches. Investment intentions in the second quarter, according to the Bank of England, were at their lowest since 2010.

Yes, the weak pound is making purchases of UK firms cheaper for foreign investors, and the tech sector has done well in attracting foreign funds. But overall foreign direct investment is much lower than a year ago. And as we approach yet another departure date, which may itself be extended, one must wonder whether business investment will ever return to its earlier trends.

All this will leave the UK far behind its rivals, in a world where the EU's easy access to our goods and services and the sophisticated supply chains developed over many years will have been severely dented. The prospect therefore is, as project fear argued, low growth in the longer term. Much lower than we were used to and with productivity fatally dented.