What has driven the recent weakness of business investment?

Published on 17 April 2019

Recent weak business investment appears to reflect the impact of Brexit uncertainties. The recovery of investment from the 2008 recession was in line with previous episodes until the EU Referendum Act was passed in 2015.

At the time of the February Inflation Report, business investment had been declining for three consecutive quarters to 2018 Q3. The level of business investment was almost 2% lower than a year earlier, despite the economy and employment continuing to grow over the same period. Since then, this pattern of weak investment has continued into Q4.

Weak investment appears to primarily reflect Brexit and associated uncertainties. The recovery of business investment from the 2008 recession was broadly in line with previous episodes until the EU Referendum Act was passed in 2015. Since then the recovery in business investment has stalled (Chart A).

The recovery in business investment has stalled since the EU referendums(a)

Business investment after previous recessions

Sources: ONS and Bank calculations.

(a) Chained‑volume measure. Recessions are defined as at least two consecutive quarters of negative GDP growth. Previous recessions include those beginning in 1973, 1975, 1980 and 1990. A recovery ends if a second recession occurs in the period shown.

Surveys of companies generally confirm the negative impact of Brexit uncertainties on investment. The Agents’ recent survey of investment intentions cited Brexit as the largest headwind to capital spending, and the Bank’s Decision Maker Panel (DMP) Survey suggests that Brexit’s importance as a source of uncertainty has risen further in recent months.

Although weaker global growth may have reduced the demand for investment, it is unlikely to explain the marked weakness over the past year. UK business investment growth dropped below growth in other advanced economies (Chart B), consistent with a UK specific factor depressing investment.

UK business investment growth has dropped below other advanced economies(a)(b)

What impact has Brexit had on business investment

Sources: Eikon from Refinitiv, Japanese Cabinet Office, OECD, ONS, Oxford Economics, Statistics Canada, US Bureau of Economic Analysis and Bank calculations.

(a) Chained‑volume measure.
(b) Business investment is not an internationally recognised concept. This swathe includes similar series derived from other countries’ National Accounts. Private sector business investment for Italy. Business investment minus residential structures for Canada. Non‑residential private investment for Japan and the US. Non‑government investment minus dwellings investment for France and Germany.

Other determinants of business investment have generally been supportive. Rates of return on capital have remained robust, especially in the manufacturing sector. Survey measures suggest firms are operating with limited spare capacity which should increase the incentive for firms to invest.

This analysis was presented to the MPC as part of its February 2019 round.

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