Investment decisions and Brexit
Official economic data suggest that investment growth has been weak in recent years, especially in the post-referendum period. DMP members are also asked about their current and past level of capital spending as well as their expectations for investment over the next year. According to the latest results, averaging across firms, annual growth in nominal capital expenditure fell back from around 4% in 2018 Q2, to around 1% in 2018 Q3. It has generally been subdued since the referendum (shown by the solid red line in Chart B). Looking a year ahead, investment growth is expected to remain modest with capital spending expected to grow by around 2.3% in the year to 2019 Q3 (the dashed red line in Chart B).
Brexit uncertainty appears to have had a substantial dampening effect on investment growth. Companies who view Brexit as an important source of uncertainty reported that the level of their investment was around 5% lower than a year ago in 2018 Q3 (shown by the red line in Chart C), while firms who did not view Brexit as an important source of uncertainty reported an increase of almost 10% (shown by the blue line in Chart C).
Over the period since the referendum, there appears to have been three phases to the impact of Brexit uncertainty on investment (Chart C). In the first year after the referendum, investment growth was lower for firms who reported that Brexit was an important source of uncertainty than it was for firms who reported that Brexit was a less important source of uncertainty. There was then a period when investment growth for these two groups was more similar, before a third phase since the middle of 2018 when investment growth has weakened again for firms who say that they are more exposed to Brexit uncertainty.
Brexit may weigh on future investment decisions too. In the latest November to January surveys, panel members thought, on average, that there was a 33% chance that Brexit would reduce capital expenditure over the following year (Chart D). The probability of Brexit increasing investment spending was estimated at 8%, with a 59% chance of no impact.4 The probability attached to Brexit reducing investment over the next year was higher in the latest survey than when the question was last asked in May-July 2018, although it was similar to the level reported shortly after the referendum in September-October 2016.