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Expert View

Brexit uncertainty hammers foreign investment

by Vicky Pryce | 23.05.2018

Vicky Pryce is an economist and commentator and former joint head of the UK Government Economic Service.

Estimates for the first three months of 2018 showed that economic growth had come to a virtual standstill. An increase of just 0.1% in economic activity in the first quarter of the year was blamed by some who wanted to wish it away as being the result of the disruption caused by bad weather – the “Beast from the East”. But the Office for National Statistics insists this was not so, attributing the slowdown partly to Brexit uncertainty.

The figures may well be revised upwards with the second estimate this Friday, but the Brexit factor is clearly there and cannot be ignored. Mark Carney, Governor of the Bank of England, has reiterated his view – before the Treasury Select Committee in the House of Commons – that each household is already some £900 worse off as a result of the Brexit vote.

That is without adjusting for a boost that might have been expected from the strong global economy, which on past trends would have put us at the top of the league of developed nations’ growth. Instead we are at the bottom of the G7, on a par with Italy, which is going through a political crisis of its own. The latest CBI industrial trends survey showed that after weak growth early in the year UK manufacturing output hardly moved in the three months to May.  

Low investment seems to be at the heart of it. Three sets of data confirm this: 

First, the latest KPMG survey of business leaders showed growth expectations falling among British chief executives, largely reflecting concerns about the rise of economic nationalism and the impact of Brexit. Any company would be more cautious with investing in an environment where uncertainty prevails. 

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Second, there has been a sharp drop in company registrations in the UK, coming from the EU, which must owe a lot to Britain’s exit vote and the uncertainty it has created. Figures for 2016/17 from Companies House demonstrate that the yearly drop was most pronounced among Dutch businesses (down 54%), French (48% lower) and Belgian firms (down 34%).

Third – and largely unreported – there was a staggering decline in foreign direct investment into the UK in 2017. OECD data released in April showed a drop in FDI into OECD countries overall, but within this the amount flowing into the UK economy last year, both into productive capacity and acquisitions, declined by 90%. This was despite the fact that the fall in sterling since the referendum made British businesses much cheaper to buy. 

Low investment is a major reason why productivity has been so poor in the UK since the financial crisis, a trend accentuated since the referendum. After a brief pick-up late last year, output per hour went down again in the first quarter.

Without the high levels of FDI that the UK has traditionally enjoyed, our productivity would have been substantially lower and the country much poorer. Sadly, if current trends continue it will take a long time to catch up with our competitors. The high and abiding price of Brexit is becoming more apparent with every passing day.

Edited by Quentin Peel

One Response to “Brexit uncertainty hammers foreign investment”

  • Although I’m not a British citizen I think I have a right to have a say in the Brexit issue, as it is highly harmful not only for the UK but also for the EU.
    Mark Zuckenberg has made clear that the Russian bots have been decisive for the results of the referendum. When a democratic vote has been corrupted in such a blatant way, there will probably be mechanisms in the British legislation to render void the whole process. This may be an issue worth exploring. Kind regards.