Brexit uncertainty has British business on edge and disheartened
British productivity is falling at its fastest pace in five years and business investment has stalled since the 2016 Brexit vote
Huthwaite — As uncertainty over Brexit spills into its fourth year, Swiftool Precision Engineering (SPE) has taken a tough investment decision: it will press ahead with a plan to spend £250,000 (about R4.7m) on a 3D printer but a new workshop roof will have to wait.
Like many British companies, the small, family-owned firm, which 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.
“You become more mindful,” director Sam Handley said at the company’s workshops, near Mansfield in central England, where it employs 126 people.
SPE is not alone in being cautious. British business investment has fallen 1.1% since the Brexit referendum in June 2016 and analysts warn that could cause long-term damage to the economy. Over the same period, business investment in the other G7 big, industrialised economies has risen 10%, with the US posting an increase of 13%, 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 Britain’s Rolls-Royce, US company Baker Hughes, and Germany’s Siemens, and is busy working on scores of potential new orders.
British 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 the UK parliament. “It’s disgraceful.”
Weak business confidence is not just a British phenomenon. The International Monetary Fund (IMF) says China-US trade tensions are hurting investment globally. But Brexit uncertainty threatens to turn the British problem into a crisis.
Bank of England (BOE) deputy governor Dave Ramsden said in October that weak investment has eaten away at Britain’s growth potential to the extent that the economy is now too inflation-prone to allow the central bank to cut interest rates.
The automotive sector — which is grappling with the prospect of high EU tariffs on top of global upheaval within the industry — cut investment by more than 70% in the first half of 2019, according to an industry group.
European planemaker Airbus, meanwhile, warned earlier in 2019 that it might stop building aircraft wings in Britain if the country leaves the EU without a withdrawal agreement.
Warning signs about Britain’s diminishing growth potential are flashing in its productivity record. It has long lagged the performance of the US, France and Germany, and in the three months from April, British 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 set up in 2016 by his university, along with Stanford University and the BOE, did not bode well for productivity. “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 decision-maker panel survey also showed that constantly changing Brexit scenarios are distracting companies from focusing on boosting productivity.
Johnson says things could improve quickly. Getting his Brexit deal through parliament will “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 that 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 will try to a strike a new exit deal and hold another referendum, throwing the Brexit question up in the air again.
Sterling and steel
At SPE, which makes parts for shipyards working for Britain’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 hit from a bout of sterling weakness in 2018, makes sure it hedges all its foreign exchange exposure.
But 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 Britain secure post-Brexit trade deals with the US and others.
Having to comply with different sets of rules would mean additional costs for British 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 12-18 months’ time,” Handley said. “But you’ve just got to find a way round it if you can.”
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