Business investment needs to be a focus of November’s Budget

There was very little in the Spring Statement to set pulses racing, however this was always promised to be an economic update rather than a significant fiscal event. Given the current focus on the existing and future state of the UK economy, creating no further anxiety may also be seen as a positive outcome by some. 

Little change to the OBR’s forecasts ...

As far as forecasts go, the OBR’s update was unsurprisingly similar to its November forecast. There was a slight upgrade to 2018 growth and slight downgrades to the 2021 and 2002 outlook, in addition to upgrades to the outlook for public finances. In line with the broad consensus, the OBR view is that the UK is stuck in a stable but relatively low growth groove, when compared to the historical trend. 

... but plenty of risk ...

The risks to this forecast appear heavily weighted to the downside. The two main drivers of the UK economic outlook since the EU Referendum vote have been the lower exchange rate and the fall in business confidence. The former created higher inflation and a squeeze on consumers, with some slight boost to exports. The latter has seen investment and business spending held back below the levels we would typically expect, given the improvement in global growth and the opportunities being offered by investment in new technology. The forecast assumes the impact of these changes has largely run its course, hence the relatively benign outlook.

In reality, the risk of further shocks as the Brexit process progresses are a very real possibility. The working assumption held by many of the clients I talk to is that the UK and EU will agree a transition deal by the end of March and this will lead to the outline of a future trade agreement by year end. However, we have seen how sensitive sterling can be to changes in the assumptions on the path to Brexit and any significant changes to the current view on timings and deals could deliver a significant shock to the UK’s currency and business confidence. If this was to happen we could quickly find ourselves in a re-run of the second half of 2016 with another slowdown in growth.

... potentially strategic ...

But it is not the short-term outlook that poses the biggest risk. One of the consequences of the fall in corporate confidence is a relatively poor outlook for business investment. As the EY ITEM Club’s recent report on business investment pointed out, the UK currently invests a smaller share of GDP than any of our developed country peers. Even allowing for the UK’s higher intangible investment, the UK will need to up its game. 

Without investment, the UK will be hampered in its ability to transform and respond to disruptive trends such as technological change, an ageing population, and new models of trade and migration post-Brexit. This is particularly important for key areas of the economy such as the retail sector, which is facing challenges from lower consumer incomes, technology driven pressures on business models, higher import costs and changing customer tastes.

... requiring imaginative plans.

With the UK’s main fiscal event in November, businesses now will be looking to Chancellor’s Budget to address a number of key areas for the economy including: 

• a plan of how we will address the challenges in public services, most obviously the NHS, social care, prisons, housing and education, especially as an ageing population increases the pressure on public finances
• setting out the shape of the UK’s future infrastructure, especially in areas such as ports, roads and rail that will be directly impacted by Brexit
• building a workforce with the required skill levels for the future post-Brexit
• providing a vision on how Government and business can work together to secure the investment the UK needs to remain competitive, turning the industrial strategy into a plan that encompasses capital investment and intangibles

Unless these key issues are addressed, there is a risk that business investment may remain subdued and the UK will continue in the slow lane.

@MarkGregoryEY

Our Economics for Business programme provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.