Faced With Brexit Questions, Firms Hold Off on U.K. Investment

By Wiktor Szary and Eric Sylvers Features Dow Jones Newswires

As the clock ticks toward Britain's exit from the European Union, evidence is mounting that companies are postponing investment plans in the U.K.

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After investment fell last year for the first time since 2009, according to government figures, a series of national surveys is finding that Brexit is weighing on business leaders' decision-making.

Britain has been gripped by political turmoil, as an electoral setback for Prime Minister Theresa May in June added further uncertainty about Britain's path out of the bloc as negotiations began over the terms of Britain's departure. Ministers have suggested the U.K. will seek a transition agreement to give businesses time to adapt, but have sent mixed signals on the shape of such a deal--keeping companies on edge.

Chancellor of the Exchequer Philip Hammond says uncertainty is giving companies pause. "It is absolutely clear businesses--where they have discretion over investment, where they can hold off--are doing so," he told the British Broadcasting Corp. in July.

"They are waiting for more clarity about what the future relationship with Europe will look like," he said.

Backers say it's too soon to gauge the impact of Britain's impending departure on business investment.

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"The plural of anecdote is not data," said Andrew Lilico, a Brexit backer and the executive director of London-based consultancy Europe Economics. He acknowledged a drop in investment is likely to come but said new trade deals will eventually pay off.

The Bank of England on Thursday cut its previous forecast for 2017 business investment growth by 0.75 percentage points, to 1%, with next year's forecast revised down by half a percentage point, to 2.75%.

The bank's Gov. Mark Carney, who echoed Mr. Hammond's view, said that the level in investment in 2020 is forecast at 20% below the level projected just before the referendum.

In a recent survey of nearly 360 businesses, conducted by the Confederation of British Industry, 40% of them said their investment decisions had been affected by Brexit. Of those, practically all said the impact had been negative.

"The prospect of multiple cliff edges--in tariffs, red tape and regulation-- is already casting a long shadow over business decisions," Carolyn Fairbairn, the CBI's director general said in early July.

"The result is a drip, drip of investment decisions deferred or lost."

Companies aren't clamoring to announce shelved investments or to suggest business isn't going well.

But a large European engineering and electronics business recently shelved plans to build an innovation center in the U.K., Ms. Fairbairn said, without naming the company.

Another survey by Deloitte LLP, covering the second quarter of this year, also showed that business leaders' moods have soured. A third of chief financial officers surveyed said they expected their capital expenditure to decline over the next three years. Brexit risks were CFOs' top fear.

The British car industry, which exported 80% of the 1.7 million vehicles produced last year, has pulled back considerably, with investment in the first half of the year reaching only GBP322 million ($419 million), according to industry lobby Society of Motor Manufacturers and Traders.

If that pace continues for the rest of the year, investment will be down 60% compared with 2016, itself down a third from 2015.

Big industry players, including Ford Motor Co., are looking for clarity on Britain's post-Brexit trading arrangements before they press on with their investment plans.

"We have significant investment decisions to make during the Brexit negotiating period," said Andrew McCall, Ford of Europe's vice-president for governmental affairs. "We are following the negotiations closely."

Paolo Pozzi, CEO of Agrati Group, an Italian maker of fasteners for the car industry that supplies manufacturers in the U.K. including Volkswagen and Peugeot, said U.K. orders dropped 10% in the second quarter after years of double digit growth.

"There are different things going on, including a correction after a period of strong growth, but Brexit certainly isn't helping," said Mr. Pozzi.

Business reluctance to invest ahead of Britain's expected exit from the bloc in March 2019 is beginning to feed into official economic figures.

Business investment grew only moderately in the first three months of the year, expanding by 0.6% on the quarter, only partly offsetting the steeper fourth-quarter decline of 0.9%, data published by the Office for National Statistics showed. Preliminary second-quarter data will be published in late August.

In the whole of 2016--the year of the Brexit referendum and significant political upheaval--business investment shrank compared to the previous year for the first time since 2009.

That's unusual given U.K. companies' healthy profits and an unemployment rate of 4.5%, at its lowest in more than 40 years. Low unemployment normally encourages businesses to invest heavily in labor-saving capital projects.

Business investment should be "racing ahead" right now, said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics in London. Brexit uncertainty is likely the reason it isn't, he said.

Mr. Lilico said the official figures don't add up to material evidence of a Brexit-induced slowdown.

"There are lots of anecdotes about investment slowing down because of Brexit, but in aggregate, I don't think the figures particularly bear that out," he said.

However, some drop off in business investment specifically because of Brexit is likely to materialize later this year and last until as late as 2020, he said.

"I don't think anyone can expect that the event on the scale of leaving the European Union can be without some transitional costs," he said. "I think that the losses from leaving will come first, and the opportunities, such as new trade deals with the U.S., Japan or changes to the U.K. regulatory environment, are a little down the line."

However, further hints that British companies are already holding back on investment comes from ONS data showing that they are stockpiling cash-- much of it outside the U.K.

Private non-financial companies' bank deposits grew by a huge GBP66 billion in the 12 months through March, hitting nearly GBP648 billion, almost four times the total amount invested by U.K. businesses last year.

The lion's share of that increase, some GBP30 billion, came from U.K. businesses depositing money abroad, with a further GBP18 billion increase in foreign currency held with domestic banks.

The growth in businesses' deposits overseas in sterling terms may partly reflect the pound's steep depreciation in the wake of the Brexit vote. But it doesn't account for the magnitude of the increase, or explain why businesses are choosing not to repatriate the money, Mr. Tombs said.

Most likely, companies are simply hoarding export proceeds to invest them abroad should Britain crash out of the EU, he said. "Investing overseas instead of at home would be an obvious choice for U.K. firms seeking to hedge hard Brexit risk," he said.

Write to Wiktor Szary at Wiktor.Szary@wsj.com and Eric Sylvers at eric.sylvers@wsj.com

(END) Dow Jones Newswires

August 07, 2017 11:39 ET (15:39 GMT)