Business investment could take years to bounce back from Brexit, says top economist

One of Britain’s top economists has said the UK's slowdown in business investment is attributable to Brexit and warned that it may only bounce back gradually over several years.

Yet Brexit has only played a small part in Britain’s sluggish productivity growth, Sir Charlie Bean, speaking as a committee member of the Office for Budget Responsibility (OBR), said today.

Read more: Employment rate jumps to record high

Answering questions from Parliament’s Treasury Committee about last week’s Spring Statement forecasts which he helped produce, Bean said the UK’s business investment was lagging behind other G7 countries. The OBR predicted it would drop for a second successive year in 2019.

“I would attribute most of the shortfall to the effects of uncertainty” and “the Brexit effect", he said. "I think the likelihood, to be honest, of resolving that uncertainty is close to negligible.”

Yet Brexit’s impact on productivity, the key driver of economic growth, “is still relatively small compared to the big uncertainty about why productivity has been so weak over the past decade”, Bean said.

The former Bank of England deputy governor highlighted that productivity is around 20 per cent below where it would have been if it had continued at pre-financial crisis levels. “This is huge”, he said. “We really don't understand what's going on.”

On the prospect of a no-deal Brexit, Bean said that any “tariff effects would be completely swamped, in all likelihood, by the exchange rate effect.” He called tariffs “pretty small beer” compared to other considerations.

He also said: “It's not obvious that tariffs would entirely pass through [to consumers], in some cases the foreign producer may absorb the tariff.”

On the effect of uncertainty on business investment, Bean said: “The reality must be surely that even if you take some of the worst [risk] off the table there is still going to be uncertainty.”

He said that should there be a quick resolution regarding Brexit, such as a deal, “you might expect a reasonably quick bounce-back.”

However, he added: “I think the more plausible story is it comes back over several years.”

Read more: Spring Statement: Hammond warns against no deal

The OBR predicts investment growth will rebound somewhat to about 2.5 per cent a year by 2020 to 2023, “but that's still below what we would expect given where we are in the cycle, with unemployment at low levels, we would have expected businesses to be wanting to do investment", Bean said.

Today, the Office for National Statistics (ONS) announced that unemployment in Britain was at 3.9 per cent, the lowest rate in 44 years.