UK firms scale back investments as interest rates rise, BoE survey finds

British companies are cutting back on investment due to higher interest rates, according to an influential Bank of England survey on Thursday, which has raised fresh concerns about the country’s lackluster capital spending.

Responds to the central bank’s monthly reports decision-making bodyOn average, business leaders estimated that higher interest rates would reduce their investments by 8 percent compared to what they would have been if they had not been increased.

The study, based on interviews with chief financial officers in the first half of December, also showed a 0.5 percentage point increase in wage growth expectations for the coming year to 6.3 percent. The rise supports the view that the BoE will tighten further in 2023.

However, corporate inflation expectations remained largely unchanged. Their expectation for three-month average producer price growth fell to 5.9 percent in December from a peak of 6.6 percent in the three months to September.

Markets are pricing in another hike in interest rates when the BoE’s monetary policy committee next meets on February 2nd. The odds are almost evenly split between a 50 and 25 basis point rise after a 50 basis point rise to 3.5 percent last month.

Line chart of annual percentage change in nominal wages by forecast date, showing that UK companies expect higher wage growth

Interest rates have risen sharply since a record low of 0.1 percent in November 2021 as the BoE tries to combat high inflation.

The results of the latest DMP survey, conducted by the BoE in August 2016 with academics from Stanford University and the University of Nottingham, suggest that interest rate hikes are likely to hit already poor levels of UK capital investment.

Corporate investment in the third quarter of 2022 was 8.1 percent below pre-coronavirus pandemic levels, corresponding the Office for National Statistics. Gross domestic product, on the other hand, recovered much faster and was 0.8 percent below the value of the fourth quarter of 2019 in the same period.

Investment levels in the third quarter of 2022 also fell by 6.4 percent compared to the second quarter of 2016, when the UK voted to leave the EU. Business investment in the US increased by 22 percent over the same period.

Line chart of 2019 value in £bn showing UK business investment has lagged behind trend

The Office for Budget Responsibility (OBR) severely downgraded its outlook for corporate investment last November.

The independent fiscal watchdog predicted in March last year that investment would return to pre-pandemic levels by mid-2022, thanks in part to the corporate tax “super deduction” that expires at the end of March this year. But she now reckons that won’t happen until late 2025.

The major downgrade is the result of the UK economy entering a recession, higher interest rates and higher energy prices.

Many economists see the underperformance of business investment, which is critical to productivity growth and raising living standards, as a drag on medium-term growth prospects.

In the Financial Times’ annual survey of leading UK economists, OBR Non-Executive Director Bronwyn Curtis said: “Weak corporate investment has hit the economy hard and I expect it will continue for years to come.”

Yael Selfin, chief economist at the consulting firm KPMG, sees it similarly. “Poor investment and export performance remain a major concern for the UK’s medium-term growth prospects,” she noted.

https://www.ft.com/content/da203e04-4d97-4d35-92b6-22ff00900aa6 UK firms scale back investments as interest rates rise, BoE survey finds

Adam Bradshaw

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