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Analysis

How bad does it have to get before we rethink?

by Alan Wheatley | 25.10.2017

Each tick of the clock counting down to Brexit is being followed by an anxious beat of the drum from business warning of the dangers to jobs and growth. It’s a drumbeat getting more insistent by the day.

Just in the last day, we have had Toyota saying the “fog” of uncertainty over Brexit threatens its Burnaston factory in Derbyshire, which exports 80-85% of the 180,000 cars a year it makes to continental Europe. We have had Michael Bloomberg, the former Mayor of New York and owner of the giant financial information group, saying Brexit is the “stupidest” thing a country has done apart from electing Donald Trump as US president. And now the first official statistics for the third quarter of this year show the economy grew just 0.4%.

Last week the EEF manufacturing association sounded the alarm. It said investment had dropped to 6.5% of turnover from 7.5%  last year. An EEF survey found that 51% of manufacturers were planning to invest more over the next two years, up from 43% in 2016. But the money would largely be spent replacing clapped-out machinery, not on new kit to improve efficiency or ramp up output.

Global demand is buoyant, so conditions should be ripe for companies to expand. “But Brexit means the future outlook for investment is not clear cut,” according to EEF economist Lee Hopley.

The car industry, for one, which relies on just-in-time delivery of components from the EU, has sharply curtailed investment because of Brexit uncertainty. Capital spending is running at just half last year’s rate.

No wonder that five business lobby groups, including the CBI, are serving notice that time is running to clinch a transition deal before companies put 2018 investment plans on hold and activate contingency plans for a no-deal, cliff-edge Brexit.

“Failure to agree a transition period of at least two years could have wide-reaching and damaging consequences for investment and trade, as firms review their investment plans and business strategies,” the groups write in a letter to Brexit Secretary David Davis.

Some firms, such as Goldman Sachs, are already acting. Its boss, Lloyd Blankfein, tweeted last week: “Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there. #Brexit”.

The lobbyists’ warning could be waved away as special pleading if Britain’s economy was strong enough to withstand the shock of Brexit. It is not. If companies had been investing for the long term in workforce training and high-tech equipment, the prospect of being sundered from their main market might have generated less fear.

As things stand, however, Britain is way behind its peers even before Brexit. Productivity, the key to rising living standards, is nearly a quarter lower than in France – yes, strike-bound, sclerotic France – never mind Germany.

Capital investment, by the state and business combined, stands at a shamefully low 16% of GDP, well down on the average of 21% in the G7 and the OECD. The five-point gap has been there since the turn of the century. Business investment is only 5% higher than pre-recession levels, compared with 30-60% this long after previous downturns, according to the Office for Budget Responsibility.

No surprise, then, that the UK has the lowest density of industrial robots of any major country. Italy has installed twice as many as we have; Germany, four times more. As for the quality of the labour force, more than a quarter of UK workers have only low skills.

So there we have it: sluggish growth, appalling productivity, low and falling investment. Does that add up to a crisis? Perhaps, like a rusting bridge, the economy is heading for corrosion rather than imminent collapse. But that is before we expel ourselves from the largest free trade area the world has known, with all the uncertainties that entails.

The OECD reckons those uncertainties could stifle growth for years to come. For that reason, it said last week, it is vital for the UK to maintain the closest possible ties with the EU. It even suggested that if Brexit is reversed by a new referendum, “the positive impact on growth would be significant”. Now that’s an idea.

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Edited by Hugo Dixon