Multiple factors are affecting Britain’s economy at the moment with spending power dropping due to high inflation. This is causing family finances to dwindle. House prices are seeing a drop as sellers lower prices to find buyers amidst high mortgage rates. And in response to weakening consumer confidence, external demand is dropping as the global cost of living continues to bite.
One area that’s yet to drop so sharply is business investment. This may come as a surprise to many people as its an area that many experts tipped as a weak point in the country’s economy particularly after Brexit. But it seems to be recovering, up 0.7 percent from the first three months of the year, meaning that the gap between its present and pre-pandemic level is the smallest since the pandemic began.
The uptick is also unexpected given the predictions over where economic growth was headed this ear. The Bank of England expected the longest slump in a century back in November. But early 2023 jump could be a wolf in sheep’s clothing, being driven by temporary factors that have made it appear better than it is.
The Prime Minster’s super deduction, allowing businesses to take off 130 percent of the value of certain investments from their corporation tax liabilities ended in March. “The breakdown of the business investment data for Q1 suggests that investment was artificially boosted by businesses bringing forward planned spending in order to take advantage of the government’s super-deduction policy,” analysts at Pantheon Macroeconomics have said. A “front-loading” effect happened as many companies raced to get that tax break.
High interest rates are also bad for business investments particularly when debts are structured around spot rates rather than being fixed and locked in over a long period of time. Around 80 percent of corporate debt in the UK works this way.
Rates have been pushed up by the Bank of England to 4.5 percent and markets hope that they are on track to bring them up to at least 5.25 percent to tame inflation. This would list rates on new corporate lending to around 6.5 percent according to Pantheon Macroeconomics.
Britain is tipped by the IMF to avoid a recession though the call comes before markets raised their peak interest rates expectations. The threat of a deeper slump is very real if market expectations are not met. This would amplify caution over how businesses manage finances. Repaying debts with any excess cash could be a higher priority compared to new IT equipment or moving to a new office. Some sectors could aim to trim capital expenditure more than others. Real estate and manufacturing are very sensitive to rate changes because of their end consumers usually borrowing money to fund the product.
In order to turn the country’s economy around and hope for better growth and living standards, investment is needed but the chances are slim.