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Brexit damage seen in slumping UK business investment

Business investment in the U.K. has been between 6% and 14% lower than it would have been in the wake of the June 2016 EU referendum vote, according to a Bank of England survey.

Despite shrinking by 0.4% in the second quarter of the year, the U.K. economy has performed better than many had anticipated as consumer spending defied Brexit gloom, while the government is beginning to loosen its purse strings following a decade of austerity. However, the rate of U.K. company investment has been lagging both other developed economies, and previous post-recession recoveries, since the decision to withdraw from the European Union.

Business investment was a drag on the U.K. economy in the third and fourth quarters of 2018 and the first quarter of 2019, declining by between 1.3% and 2.5% across the three quarters. As attempts to agree a Brexit deal flounder, numerous sentiment surveys have highlighted the lack of business confidence regarding the future trading relationship with the European Union, which accounted for 46% of U.K. exports and 53% of imports in goods and services in 2018.

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"Business investment is projected to fall over the rest of 2019. This is despite limited spare capacity and accommodative credit conditions which would be expected to support lending," the Bank of England wrote in its August inflation report.

Having been top of the charts in the first quarter of 2015 with growth of 7%, the U.K. had the weakest growth in business investment of the G-7 — a club of rich countries — in six of the last seven quarters. The competition is not particularly strong either, with Italy's economy stagnating in the second quarter of 2019, having been in technical recession in 2018.

The stall in investment is a historical outlier when compared to the typical recovery of business activity in the U.K. following a recession. When peak GDP in 2008 equates to 100, the business investment index was at just 112 some 42 quarters later. By contrast, in previous recessions, the worst index reading — for recessions beginning in 1973, 1975, 1980 and 1990 at such a late stage was 133. Until the referendum, the recovery in investment had been in line with past experiences.

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