If only. It turns out that if companies had invested rather than let cash reserves build, then the UK economy would have grown by no less than 2.5 percentage points more than it managed in 2017 – instead of being one of the weakest performers in the euro area and G7, it would have been the star.
2017 was good year for corporate profit margins in the UK. As a percentage of GDP, gross trading profits have been rising nicely this decade, but here is the snag, companies are not investing in sufficient volumes.
According to Pantheon Macroeconomics, since the first few months of 2016, the corporate cash stockpile for UK companies has risen from 34 to 37 per cent of GDP.
In Q3, 2017 alone, cash stockpiles rose by £69 billion.
This is a problem, because what UK plc needs is more investment. If this rose, then UK productivity would rise too, and with that wages would go up, and with that, a far more-healthy UK plc would emerge.
In fact, in 2017, investment did okay, up two per cent, and came it at 9.3 per cent of GDP, that is a tad above the historic average. That might seem alright, but everything is relative.
And it’s a problem for two reasons.
First off, business investment was hopelessly below the level that was needed during the first few years of this decade – the UK has a lot of making up to do, and average growth is not good enough.
Second off, business investment rose much more quickly in the US and euro area, close to five per cent growth in both regions.
In fact, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says that business investment would have been around one-quarter higher —and GDP 2.5 per cent higher than it has been since Q1 2016 had firms spent, rather than hoarded this money.
Working out why business investment was lower than in the US and euro area is not so hard – Brexit related uncertainty has made its mark. Mr Tombs said: “We continue to think that the UK government will make all the concessions required to ensure that a transition deal is agreed this year. But the EU appears to be playing hardball, insisting that the transition period ends in December 2020, so that it aligns with the end of the EU.'s multi-year budget. Firms likely will have little visibility on the nature of the UK's relationship with the EU post-2020, given that Theresa May's cabinet can't reach a consensus. Ultimately, we expect this government and its successors to continue to kick the can down the road and continuously to agree with the EU to extend the transition period at the last minute. But this ad-hoc approach to policy will fall short of giving firms the confidence they need to make long-term investments.”
