ALEX BRUMMER: Businesses driving UK growth
Illusion: Chancellor Jeremy Hunt
Resilience is becoming an overused word when it comes to the UK economy. However, despite a growing tax burden and 14 interest rate hikes since December 2021, it continues to defy the odds.
Boosted by business investment, the latest production data revised growth in the first quarter upward from 0.1 per cent to 0.3 per cent, confirming a 0.2 per cent rise in the three months to June.
It may not be a huge success, but it lifts the UK’s growth rate of 1.8 percent since 2019 above that of France, and leaves Germany’s performance since the pandemic in the dust. The Labor Party has dug a hole with claims that Britain is at the bottom of the G7 growth league.
Critics will point to stronger results in the United States. Both Donald Trump and Joe Biden embarked on a campaign of fiscal largesse unlike anything seen since the New Deal in the 1930s. That’s why Washington began the weekend under the threat of a government shutdown. Furthermore, the propensity of American consumers to spend their Covid-19 savings has been higher than in Europe, as recent work by the European Central Bank shows.
The most surprising aspect of the UK’s expansion is the continued revival in business investment, which rose to 4.1 percent from 3.4 percent in the second quarter.
This may be partly a response to Rishi Sunak’s “double deduction” for equity investments which ended on 31 March.
But we must not forget that Jeremy Hunt replaced it with a full write-off of capital investment costs as a sweetener for the jump in headline corporation tax from 19 per cent to 25 per cent. In the year to June, business investment rose 9.2 per cent, an impressive improvement from 6.9 per cent. Obviously, trade still has faith in the UK, as demonstrated by the recent commitments made by Jaguar Land Rover, BMW, Nissan and BAE in the aerospace sector.
Maintaining production momentum is difficult given the difficulties arising from the fiscal burden and higher mortgage and borrowing costs. Not everything is pessimism here either. Housing, a big driver of consumer spending in Britain, is under pressure. However, mortgage lending showed surprising buoyancy in August and mortgage approvals, while declining, are not falling.
A healthier economy will get the Office of Budget Responsibility back on track ahead of the fall statement. The cuts and changes at Downing Street have not helped the UK’s reputation.
But it has not hindered a much-needed revival of business investment.
Sherard Cowper-Coles is to step down as HSBC’s head of corporate affairs after ill-advised comments about the UK being “weak” in restricting dealings with China. As a seasoned diplomat with an impressive track record in hotspot Afghanistan and the technological metropolis that is Israel, he should know better.
The paradox is that HSBC continues its pivot towards China. As a bank, it prefers to be sotto voce in its dealings with China and place relations in a context that goes back centuries rather than the last decade.
However, Western economies and the International Monetary Fund find Beijing problematic. Nothing illustrates this more clearly than the standoff over the bailout of Sri Lanka. The country’s GDP plummeted 9 percent over the past year. A plan for a $300 million IMF emergency loan, which was due to be implemented on September 27, collapsed due to Beijing’s obstinacy.
The financing was conditional on Sri Lanka restructuring its debt, which would require China to accept a cut in official loans, something it refuses to do. India is willing to pick up some of the slack. But China now sees New Delhi as a genuine regional rival.
As poverty rises in Sri Lanka and settles on a precipice, geopolitics rule.
Diehard climate change campaigners have nothing to do with the idea that licensing the Rosebank oilfield off Shetland will bolster the UK’s energy security as the country moves towards net zero. The Government is pursuing a two-track approach. This is symbolized by the decision to press ahead full steam ahead with a plan to bring solar and wind power from the Moroccan Sahara to Cornwall via an undersea cable.
The project, pioneered by former Tesco boss Dave Lewis, would provide enough power for 7 million homes and cover 8 per cent of the UK’s energy needs.
Coming after the recent devastating earthquake and ahead of next month’s (OCT) IMF meeting in Marrakesh, the timing could not be better.