Brexit stalemate taking a toll on UK business investment

Productivity in the UK has fallen at its fastest pace in five years, and investments have stalled since the Brexit vote.

An engineer carries out quality control work on steel parts at Swiftool Precision Engineering Ltd''s facility near Mansfield, Britain, October 30, 2019
Like many United Kingdom companies, Swiftool Precision Engineering (where a worker monitors quality control, above) is proceeding with caution when it comes to business investment while uncertainties surrounding Brexit persist and investment in the UK falls [File: Phil Noble/Reuters]

As uncertainty over Brexit, the United Kingdom‘s pending exit from the European Union, spills into its fourth year, Swiftool Precision Engineering (SPE) has made a tough investment decision: it will press ahead with a plan to spend 250,000 pounds ($321,400) on a 3D printer while a new workshop roof will have to wait.

Like many UK companies, the small, family-owned firm that makes parts for aircraft engines and offshore oil wells wants more clarity on what leaving the EU might mean for its business before carrying out all its investment plans.

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“You become more mindful,” director Sam Handley said at SPE’s workshops, near Mansfield in central England, where the company employs 126 people.

SPE is not alone in being cautious. British business investment has fallen 1.1 percent since the June 2016 Brexit referendum, and analysts warn that it could cause long-term damage to the economy.

Over the same period, business investment in the other Group of Seven (G7) big industrialised economies has risen 10 percent, with the United States posting an increase of 13 percent, according to Alpesh Paleja, an economist with the Confederation of British Industry.

“With every piece of machinery, we have to convince the bank that we are doing the right thing. Every decision counts,” Handley said.

SPE cuts parts to within a hundredth of a millimetre for global manufacturers such as the UK’s Rolls-Royce, US company Baker Hughes and Germany‘s Siemens, and the company is busy working on scores of potential new orders.

UK Prime Minister Boris Johnson is urging voters to end the Brexit impasse by giving him a majority in parliament in an election on December 12, so he can get the divorce deal he struck with Brussels last month past lawmakers.

But like many executives frustrated by Brexit, Handley is not counting on a breakthrough any time soon.

“I don’t think the uncertainty is going to lift at all. I think we might get a hung parliament. If this was a business, they would have been removed from their post,” she said, referring to parliament. “It’s disgraceful.”

Productivity plunge

Weak business confidence is not just a UK phenomenon. The International Monetary Fund says China-US trade tensions are hurting investment globally. But Brexit uncertainty threatens to turn the UK problem into a crisis.

Bank of England Deputy Governor Dave Ramsden said last month that weak investment has eaten away at the UK’s growth potential to the extent that the economy is now too inflation-prone to allow the central bank to cut interest rates.

The car sector – which is grappling with the prospect of high EU tariffs on top of global upheaval in the auto industry – cut investment by more than 70 percent in the first half of 2019, according to an industry group.

European planemaker Airbus, meanwhile, warned this year that it might stop building aircraft wings in Britain if it leaves the EU without a withdrawal agreement.

Warning signs about the UK’s diminishing growth potential are flashing in its productivity record.

Its performance has long lagged behind that of the US, France and Germany and in the three months from April, UK output per hour fell at its fastest annual pace in five years.

Paul Mizen, an economics professor at the University of Nottingham, said a survey of companies that his university set up in 2016 in partnership with Stanford University in the US and the central bank in the UK did not bode well for productivity going forward.

“Investment growth has been affected to the greatest extent among the most productive firms, which indicates that the productivity average for the UK as a whole will be lower.”

Mizen said the survey also showed that constantly changing Brexit scenarios were distracting companies from focusing on boosting productivity.

Prime Minister Johnson says things could improve quickly. Getting his Brexit deal through parliament would “unleash a great tide of investment into this country and be a demonstration of confidence in the UK economy”, he told lawmakers in October.

But even if Johnson secures his divorce deal, it looks unlikely he would be able to settle the next stage of Brexit quickly by hammering out a new EU trade deal before another potentially nerve-jangling deadline at the end of 2020.

What’s more, the opposition Labour Party has raised the prospect of more uncertainty. If it wins on December 12, it would try to strike a new exit deal and hold another referendum, throwing the Brexit question up in the air yet again.

Sterling and steel

At SPE, which makes parts for shipyards working for the UK’s navy as well as the aviation and petroleum sectors, Handley assumes there will be more bumps in the road.

Potential Brexit problems include disruption at Britain’s borders with the EU that could push up the price of the steel her company needs – or a further fall in sterling that would make imports of key parts from the US more expensive.

To address those risks, SPE has stockpiled steel and, after taking a 140,000-pound ($180,000) hit from a bout of sterling weakness in 2018, makes sure it hedges all its foreign exchange exposure.

But at the top of Handley’s worry list is uncertainty about the rules for the aviation industry – its biggest growth market.

Johnson has left open the possibility of diverging from EU standards in sectors such as aviation to help the UK secure post-Brexit trade deals with the US and others.

Having to comply with different sets of rules would mean additional costs for UK manufacturers that could erode their competitiveness.

“There was just no warning about that,” Handley said. “It felt so unfair.”

For now, SPE is pressing on with day-to-day business. In a room off a busy workshop, sales staff are working on more than 70 inquiries from potential customers.

“I think we will still be in a state of flux in 12 to 18 months,” Handley said. “But you’ve just got to find a way around it if you can.”

Source: Reuters