Spring Statement 2019: Weak business investment lowers GDP forecast

Written by Aimie Stone, Senior Economist at ADS

In its most recent Economic and Fiscal Outlook, the Office of Budget Responsibility (OBR) said that its economic forecast has been ‘produced against the backdrop of considerable uncertainty’. But despite the rising Brexit uncertainty, the assumptions that the OBR used for its forecast are based on an orderly departure from the EU on 29 March into a transition period that lasts to the end of 2020. These are the same assumptions the OBR made in last forecast in October 2018.

While they might have been sensible then, with two weeks until 29 March, these assumptions are highly unrealistic now. Even with this rose-tinted outlook, the OBR has lowered its forecast for GDP growth from 1.4% to 1.2% in 2019. After that, the OBR becomes more optimistic, with GDP growth picking-up in 2020 and beyond.

It’s worth looking a little more closely at why GDP growth is expected to be weaker this year. According to the OBR, growth this year will be held back by falling business investment and net trade.

2018 2019 2020 2021 2022
Current GDP Growth Forecast (March 2019) 1.4 1.2 1.4 1.6 1.6
Business Investment Forecast -0.9 -1.0 2.3 2.3 2.4
Net Trade (as contribution to GDP growth) -0.2 -0.5 -0.2 -0.1 -0.1

Short term outlook

With the UK already experiencing four-consecutive quarters of falling business investment, the significant downgrade to the OBR’s forecast for business investment growth in the short term is a key concern. The continued levels of uncertainty around Brexit as well as little clarity on the UK’s future trading relationships is already acting as a deterrent for companies looking to invest.

In his spring statement speech, the Chancellor emphasised a focus on productivity improvements going forward, more linked to wage rates than business investment. But declining business investment typically puts a cap on future GDP and productivity growth.

Medium term outlook

The mid-term outlook forecasting a rise in business investment seems to be the key figure underpinning the increase in GDP growth from 2020 onwards. However, there is disconnect in the thought process that businesses will reverse their recent decisions and begin to put money into the UK again after the prolonged uncertainty from Brexit.

Many businesses with a UK presence have an element of foreign ownership which will look to invest in countries with good market access opportunities. With the status of the UK’s future trade arrangements still unclear firms are unlikely be encouraged to invest in the UK. While there will likely be a release of pent-up investment that has been on hold because of Brexit, many companies will have been unwilling to wait for the UK’s future arrangements to become clear and will simply have invested in other markets instead.

The uncertainty surrounding future of the UK’s relationship with the EU and wider trading ability, coupled with a slowing global outlook will inevitably reduce demand for UK exports. If Brexit uncertainty persist, not only will business investment be lower, but so too will net trade, putting constraining the UK’s economic outlook for longer than the OBR forecasts.