What directors need to know about the latest statistics

Investment in UK businesses has fallen once again and the latest quarterly decline for Oct – Dec 2018, which would not be so concerning if it occurred in isolation, forms part of a bigger negative pattern emerging.

The fall of 0.9% in spending on business assets like IT upgrades and machinery was the fourth consecutive quarterly fall in succession. Taken over the course of a full year –  investment in UK businesses has reduced by 2.5%.

The Office for National Statistics (ONS) also said that as well as a fall in asset spending, there was a lack of investment in transportation equipment and intellectual property products.

More worryingly is that this is the first time there has been a fourth consecutive quarterly fall in business investment since the great recession in 2008/09.

Figure 8

Household borrowing increases

There wasn’t much positive news coming from their analysis of personal borrowing and spending for the final three months of 2018 either.

The ONS found that UK households were spending more than they earned for the ninth straight quarter in a row going back to Jul – Sep 2016. They also found that the UK government was a net borrower in this quarter also.

This means that every domestic sector was forced to borrow or dip into their savings to finance their investments and spending.

They noted: “Households have traditionally been a net lender however in recent times that has not been the case. We are now seeing an unprecedented run when households are net borrowers for the ninth consecutive quarter.

“The underlying downward trend provides a clear reflection that households have recently saved less to support spending in the face of the squeeze in real incomes. Household net borrowing was 0.6% in the quarter, although this was an improvement on the total of 1.1% from the previous quarter possibly indicating an increase in wages and salaries.”

Consumption growth has slowed

Figure 7
Investment also fell in the specialist Gross Fixed Capital Formation (GFCF) index which is a broader measure of business spending on new equipment, machinery, transport and property.  
It reduced by 0.6% in the quarter which was also the third quarterly decline in a row for this index, which is also the first time this has happened since 2009.

This figure also shows that the UK has invested less in capital assets than any other G7 member country.

Figure 6

Ongoing brexit uncertainty

A recent survey of Chief Financial Officers’ (CFOs) from Deloitte found that perceptions of economic and financial uncertainty continued to rise in the final quarter while the outlook for capital expenditure has deteriorated. They summarise their key takeaways as:

  • Growing uncertainty over Brexit has led CFOs to adopt their most defensive strategy stance in nine years
  • Risk appetite is down to a nine-year low and revenue growth expectations have dropped to the lowest level since the summer of 2016
  • After a long period of easy access to cheap credit funding conditions have begun to tighten for large corporates

David Sproul, senior partner and chief executive of Deloitte North West Europe said: “This survey shows a definite ‘hunkering down’ mentality across the UK’s CFO community, highlighted by the focus on cost control, a pause on hiring and low appetite for risk.

“Given the ongoing Brexit uncertainty, this attitude is understandable and demonstrates that business urgently needs clarity about the UK’s future relationship with the EU. Unless a favourable deal is agreed, it seems likely that this current lack of appetite for investment or recruitment will continue.”

Further analysis from economist Rupert Seggins shows that this period of the UK household sector being net borrowers for such a long period is unmatched since records began in 1987. He found it was also unprecedented that every sector over the same period was also a net borrower.

He said: “In 2016, households financed their borrowing through long-term loans and the disinvestment in mutual funds. More recently, there has been a sharp drop in deposits made to UK banks by households, while the net acquisition of long-term loans and the disinvestment in mutual funds continued throughout this period to help fund household’s net borrowing.”

What to do next?

If your business is going through some tough times and the skies are darkening further then you should reach out to us.

Contact one of our expert team members today to arrange an initial chat followed by a further free follow-up consultation to discuss what options are available to possibly save your business or plan an orderly exit strategy if there is no realistic way forward for you or your creditors.