If Rishi Sunak was hoping that his massive tax break in the spring budget to boost business investment would pay off quickly, the UK’s second quarter national income (GDP) figures will have turned out to be disappointing.
Amount spent by companies on the new office kit and factory machines edged up 2.4%, but the increase left overall capital spending 15.3% below levels before the pandemic.
Lack of business investment was Britain’s Achilles heel after the 2008 financial crash, when most of the country’s growth rested on consumers spending every penny they earned and more. The uncertainty created by the EU referendum and more than four years of debate on how – or even if – to leave the trade bloc has prolonged the agony.
In the budget, the Chancellor told businesses they would get £ 1.30 off their taxes for every £ 1 spent over the next two years if the money was spent on buying new products. It seems that general nervousness about the future means that this particular policy has not got off to a flying start.
The manufacturing industry advanced in June, although it registered only a 0.2% increase, leaving factories 2.3% below pre-pandemic production levels. Construction companies fell for the third month in a row and, more worryingly, Britain’s trade with the rest of the world suffered a setback.
This left the service industry to generate much of the 1% increase in GDP in June and 4.8% of GDP in the second quarter. The increase in advertising, restaurants and a certain normalcy in the health service, which began to open to the public for non-Covid-19 consultations after more than a year of restrictions, have helped lift the service sector, the Office for National Statistics (ONS) said.
Concerns about the ability of manufacturers and construction companies to produce higher levels of production as the year progresses are likely misplaced. They are both experiencing shortages of materials and skilled personnel which are expected to ease over the coming months, even as the struggle to replace Eastern European workers in the construction industry persists for many years.
However, almost a third of the UK’s GDP is trade-related and this suffers badly, with little clarity on when and how it will fully recover. The level of GDP remains 4.4% below pre-pandemic levels, and to recover without the age-old reliance on consumer spending, exports must explode.
According to the ONS, while imports and exports of goods to the EU in May and June were above the levels recorded at the end of last year, showing a recovery after exiting the single market and the union customs, the value of exports of goods in June was £ 14 billion compared to around £ 17 billion in 2019. Worse, the upward trend has reversed. Total exports fell 1.5% to £ 48.7 billion in June and merchandise shipments fell 3.6%.
Trade with the rest of the world was in an even more precarious state. Merchandise exports everywhere outside the EU were consistently £ 2 billion above the level of exports to the EU in 2019. They are now below EU levels.
Brexiters argue that a comparison with the final months of 2020, when the UK was still part of the EU’s customs union, still holds. But ONS charts reveal trade fell in October, November and December 2020 as Boris Johnson argued with his own party over how to leave the EU. Not surprisingly, the largest increase in trade can be attributed to this period.
Likewise, comparisons with February 2020 present the wrong picture. While it can be used more broadly as a benchmark by the ONS to measure the extent of the rebound in GDP from pre-pandemic levels, trade was already down in January and February 2020 as China, South Korea and much of Asia were starting to shut down. their savings.
So the pandemic was already compounding Brexit uncertainty in the first two months of last year, leaving trade levels artificially low.
Interestingly, during this period, France went from being the UK’s fourth largest trading partner to fifth behind the Netherlands. According to government figures, during the year up to March, trade with France fell by almost a quarter.
This means that the recovery has a long way to go.