Why investment by UK companies continues to fall
Brexit uncertainty is driving cuts in transport and machinery spending, say experts Gavin Jackson in London January 8, 2019 Investment by UK companies has fallen for three consecutive quarters, in a decline that highlights how uncertainty about Brexit is prompting consumers and businesses to tighten their belts.
Business investment was 2.2 per cent lower in the third quarter of 2018 compared with the final three months of 2017, according to the latest official data. The last time companies’ capital spending fell for three consecutive quarters outside of a recession was in 2003.
Data published by the Office for National Statistics about business investment do not break down companies’ capital spending by category.
However, other data from the UK statistics agency about capital spending by the state and private sectors do provide a split into four areas: transport equipment, machinery and IT, intangible assets, and buildings and infrastructure.
It is estimated about 70 per cent of this investment is by companies, with the remainder by central and local government, meaning the private sector is usually the biggest driver of any changes in spending.

1. Transport equipment

Investment in transport equipment — which includes aircraft, cars and ships — was 12 per cent lower in the third quarter of 2018 than during the final three months of 2017.
Capital spending in this area is subject to big peaks and troughs: for example, it can be heavily influenced by when airlines take delivery of new passenger jets.
But the recent decline in investment is a function of how consumers are spending less on big-ticket items — in this instance, cars.

Investment in transport equipment surged at annual rates of close to 40 per cent in the three years before the Brexit referendum as leasing companies increasingly supplied consumers with cars, rather than people buying the vehicles outright.
This growth was rooted in how car purchases by leasing companies from vehicle manufacturers are booked as a business investment in the national accounts.
But after years of buoyant vehicle sales, the UK motor market has gone into reverse, with new car registrations falling 6.8 per cent last year compared with 2017 — the largest decline since the financial crisis.
The fall reflects fragile consumer confidence as well as a government crackdown on diesel cars because of their role in air pollution.
Ian Gilmartin, head of retail and wholesale at Barclays’ corporate banking unit, said when it came to big-ticket items consumers were “more likely to press the pause button” because of Brexit uncertainty.

2. Machinery and IT

Investment in machinery and information technology fell 3.9 per cent in the first three quarters of 2018.
As this category accounts for a bigger portion of capital spending than transport equipment, it has made a similar contribution to the overall 2.2 per cent decline in business investment.
Investment in IT such as laptops was slightly higher in the third quarter of 2018 than at the end of 2017, but spending on machinery like wind turbines fell.
“At the moment, more and more manufacturers say Brexit has an effect,” said Francesco Arcangeli, economist at the EEF, the UK manufacturers’ trade body.
Some companies are replacing old machines as they break but most are holding off on large investments because of political turmoil and questions over their order books, he added.
With clarity about whether Britain’s parliament will approve Theresa May’s Brexit deal with the EU, there may be more investment but it would take a while to feed through, Mr Arcangeli said.
“It’s not clear how long it will take . . . and if we will be able to recover completely what we lost,” he added.

3. Intangible assets

Investment in intangible assets such as patents, software and film rights almost stagnated between the last three months of 2017 and the third quarter of 2018. Spending on intangibles increased just 0.2 per cent.
This comes after strong growth in spending in this area during 2017, when total investment exceeded that on machinery and IT.
As developed countries become more focused on services and information-intensive activities, companies are investing more in intangible assets.
“This is a very long-term trend of the changing structure of the economy,” said Stian Westlake, co-author of Capitalism Without Capital, a book which examines the rise of the intangible economy.
However, Mr Westlake added that there were several reasons why intangible assets were sensitive to business uncertainty, including the challenge of disposing of them. While a bankrupt business can always sell a transit van, intangible investments can be “worth relatively little in the event of business failure”, he said.

4. Buildings and infrastructure

Investment in non-residential property — which includes office blocks, warehouses and shops — has also virtually stagnated: it was 0.7 per cent higher in the first three quarters of 2018.

The increase may reflect government spending on infrastructure, such as the new east-west rail link in London called Crossrail, rather than investment by companies.
The commercial property market has been hit by Brexit uncertainty, said Noble Francis, economics director at the Construction Products Association, a trade body.
Uncertainty particularly affects office buildings because “it is high upfront investment, particularly from international investors in the London market”, he added.
New orders for office buildings declined 25 per cent during 2017 compared with 2016, and fell by a similar proportion again in the first half of 2018, according to official data. Orders for shops have declined about 10 per cent during the same periods.
Mr Francis said falls in new orders should soon be reflected in declining rather than just stagnating investment.

Discussion points

1. When shareholders read the non-current assets section of a balance sheet, they ask questions about the company’s plans for investment in non-current assets. From the article:

(a) What are the political factors that might affect a company’s plans?

(b) What are the economic factors that might affect a company’s plans?

2. What other factors relating to the company itself might influence its plans?