Brexit Looms Large as Autos Lead the U.K.’s GPD Slowdown

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Every set of data in the U.K. prompts a surge of reports from two groups.

On the one hard, there are those inclined to stay in the E.U. who assert the very prospect of Brexit is damaging the economy. On the other, there are those inclined to leave, stating it is the delay that is causing uncertainty and the sooner Britain leaves, the sooner the economy will recover.

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What neither side argues about is that the economy is slowing.

Coupled with that, foreign direct investment (FDI) is collapsing at a time when, due to the weak exchange rate, British assets must represent a cheap bargain to foreign buyers.

Yet, according to the Financial Times, cross-border data shows capital entering the U.K. has fallen by 30% since the Brexit referendum, while investment into the E.U.’s other 27 countries in the three years since the referendum has surged 43% up to the first quarter of 2019.

About $340 billion of capital has been invested in the 27 remaining E.U. states in that period, up from $237 billion in the previous three years, according to the Financial Times. Yet, over the same period, the capital invested by foreign firms in greenfield projects in the U.K. dropped by $36 billion to $85 billion. The data tracked greenfield investments and did not include mergers and acquisitions  — which are also down, as it happens — because greenfield investments tend to drive greater productivity gains and contribute to national GDP growth.

Job creation has also grown in the E.U., the paper reports, with more than 1.2 million jobs created in the EU27 in the past three years as a result of new FDI — 474,000 more than the number of jobs created in the previous three years, according to the FT. About 53,000 of the rise in jobs was the result of U.K. companies creating operations in the rest of the E.U., particularly in information and communications technology and the electronics sectors, with about 150,000 jobs created in the EU27 in the three-year period, marking a 30% increase. By contrast, the U.K.’s job growth in such sectors has dropped by 28% during the period.

Maybe not surprisingly, GDP growth has slowed in the U.K. over recent months, in part as a result of low investment. The bigger reasons, it would seem, is uncertainty among U.K. exporters’ European clients — witness British Steel’s demise, which it blamed on a falloff in European orders.

GDP growth in Britain contracted by 0.4% in April, mostly as a result of the dramatic fall in car production from planned pre-Brexit shutdowns. Manufacturers had announced temporary shutdowns in expectation of disruption after the planned March 29 exit date from the E.U. However, by the time Britain’s departure from the E.U. was delayed in March it was too late to reverse the plans.

Car production fell by 24% in April, the biggest drop since records began in 1995. While some pundits are predicting it will bounce back, closures by Honda, JaguarLandRover, Nissan, Ford and others suggest a new normal has been reached, making production unlikely to recover if European supply chains are ruptured by a no-deal, hard Brexit.

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If a deal is struck and there is some certainty that just-in-time supply chains can continue to function much as before, it is possible some recovery may occur. Nonetheless, some of these plant closures are permanent and, deal or no deal, suggest carmaking in Britain may struggle to ever recover to previous levels.

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