The outcome of the Brexit vote and years of political uncertainty it triggered has had a chilling impact on business investment in Britain, a deputy governor of the Bank of England has said.
Dave Ramsden, the Bank’s deputy governor for markets and banking, said the fallout from the 2016 referendum had “chilled” investment levels compared with other leading nations and contributed to a lower “speed limit” for the UK economy.
“It’s hard to conclude otherwise, that the decision to leave the EU – that may have had lots of goods reasons for it – but that it has chilled business investment,” he said.
Speaking to MPs on the Commons Treasury committee, his comments come as the chancellor, Jeremy Hunt, prepares to use Wednesday’s autumn statement to focus on growing business investment in Britain.
Hunt told company bosses at a conference held by the CBI lobby group on Monday that he planned to unveil “a whole range of measures designed to unlock business investment” as the cornerstone of his growth plans.
Britain has historically lagged behind other leading economies for growth in business investment, but has fallen further back in recent years after a period of political and economic instability amid the Brexit vote, Covid pandemic and repeated “flip-flopping” of government policy.
A key driver for economic growth, business investment was now only 6% higher in real terms than in the second quarter of 2016, when the Brexit referendum was held, Ramsden said. “That’s less than 1% a year. Over that time, US business investment has gone up by over 25%,” he said.
“You can see a break in the trend for UK business investment in 2016. It had been going up since the global financial crisis and then it flattened off from 2016 onwards.”
The Bank’s deputy governor said certainty was a key driver of business investment decisions, suggesting it had been lacking in recent years. “Ideally you want low and stable inflation but also you want certainty around where fiscal policy is going, and certainty about what the kind of relationships your economy is going to have.”
He suggested weaker levels of investment had contributed to holding back the productive capacity of the UK economy. “We therefore think the speed limit the economy can grow at without triggering inflation is lower,” he said.
Answering questions from MPs before the autumn statement, Andrew Bailey, the Bank of England’s governor, warned against expectations for a rapid fall in UK inflation to pave the way for interest rate cuts.
Financial markets were “underestimating” the risk of inflation persisting at higher levels than anticipated, he warned.
City investors expect weaker levels of economic growth and falling inflation could lead the Bank to cut rates from the current level of 5.25% in the spring.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%,” he said. “The risks are on the upside.”