Business investment takes another dive | EEF

Business investment takes another dive

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There was no news on the GDP front today, with ONS figures leaving growth unrevised for Q1 2016, a 0.4% increase from Q4 2015. However, figures on business investment – which fell for the second consecutive quarter in Q1 2016 – are set to raise alarm bells about the current degree of confidence in the UK economy. The writing was on the wall, with the OBR shaving a hefty 4.9pp from its 2016 forecast, now predicting 2.6% growth from 7.5% previously, with the BoE following suit a few months later trimming its forecast from 5.5% to 2.5%.


Plant and machinery the main drag

Business investment fell by 0.5% in q1 2016, failing to recover from a 2% decline in the last quarter of 2015. An increase in inventories – usually a signal of impending slowing growth - helped to keep Gross Capital Formation on a positive growth trajectory, increasing by 0.5% from Q4 2015.




The main drag in the business investment figures was investment in ICT and capital equipment, which dropped by 4.9%, while expenditure on property-related assets such as dwellings and other buildings also saw a decline of 0.2% and 0.7% respectively.

Some of the weakness was offset by the solid performance in intangibles investment, where spending on Intellectual Property Products grew by 1.7%. The smallest and more volatile component of business investment – transport equipment – grew by a robust 31.5%, likely driven by fleet replacements.


What’s weighing on investment?

There is not one single factor accounting for the recent weak performance in investment. Rather declining confidence for businesses to invest is likely driven by three factors:


  1. Demand uncertainty


    With global growth sluggish, demand conditions for a host of UK products and services has been weak. In the manufacturing sector, soft demand from key export markets has left companies in the hardest-hit sectors (commodity and investment goods manufacturers) with spare capacity in their business. This means that a good part of them will be canning or postponing any big expansion plans beyond 2016.



  2. Weakness in oil & gas


    An issue we have talked extensively about, and one that the BoE cited to justify its hefty downgrade to its business investment forecast. The low oil price has forced oil & gas companies around the globe to cut costs and scrap exploration projects, with slashing investment in capital equipment one of the first savings on the books.


    Frail demand from the oil & gas sector has also hit capital equipment manufacturers further down the supply chain. The situation in oil & gas, combined with overall weakness in global manufacturing, are likely to be behind the large drop in spending on ICT and capital equipment in today’s figures.


    3. Referendum uncertainty

         The big wild card for the UK’s economic performance in 2016. While the impact of Referendum-related uncertainty on the data is unclear, today’s investment               figures would suggest at least some impact. Uncertainty is the chief enemy of investment and the Referendum is generating tons of it.


What to expect for 2016?

Things will be clearer once the Referendum uncertainty subsides and any impact on the data unwinds during the second half of the year. However, the referendum is just another dampening factor in the mix, with weak global growth and subdued activity from the oil & gas sector still likely to weigh on businesses’ confidence to invest in 2016. As such, we do not expect too much support to GDP growth from business investment, and in combination with a lacklustre export performance, economic rebalancing looks to be off the table this year too.  



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