The Brexit referendum today has had an effect on the real economy. At one level it has triggered substantial spending on advertising, propaganda and events. At another level it has driven gyrations in the financial markets which have broadly tracked the changing probabilities of a vote to remain in the EU. There has also clearly been a delaying of investment projects, both from inward investors (FDI) and from indigenous investors.

 

To try to understand the scale of the likely post referendum mini-boom, we have investigated the scale of the investment shortfall carefully and attempted to analyse how much of this investment might bounce back during the rest of the year after the vote.

 

Looking at the total of business investment, we estimate that this has been running for the first half of 2016 about 5% lower than can be explained using our economic models and assume that this represents the scale of the business investment shortfall. There was also a much smaller shortfall in Q4 2015. In total this amounts to a shortfall of investment of £5.9 billions at current prices. Of this, about £3 billion is IT investment. There is a small amount (c £1 billion) of building investments. The remaining £2 billions are various types of plant and equipment, mainly from delayed manufacturing investments. Investment in transport equipment such as lorries and vans has been largely unaffected by the uncertainty. The split is roughly 50-50 between manufacturing and services, but since the service sector is 4 times larger than the manufacturing sector, this implies a much bigger proportional impact in manufacturing.

 

There has also almost certainly been a weakening in other areas of business to business economic activity. The Bank of England Agents’ report for May, out yesterday, noted a weakening in the business service sector which it associated with the referendum uncertainties. M&A has been sharply down in the early part of 2016. Inbound M&A into the UK has been $43.8 billion to May, down 74% on a year earlier.

 

We believe a Remain vote is highly likely. And our calculations suggest that 70% of the delayed projects will be activated during calendar 2016 though some of the associated spending will overflow into 2017. So business investment, particularly in IT, could be booming in 2H 2016.

 

And despite being put on hold before the referendum, not all of the investment shortfall will disappear if the UK votes leave. A falling pound will make the UK much more competitive in export markets. And much of the service sector will be subject to no change in trading conditions whether the UK is in the EU or outside, though for the manufacturing sector the situation will be different. We believe that even if the UK votes leave about a third of the investment backlog will be activated in the coming 12 months, though there is also likely to be a manufacturing investment slump.

 

So we shouldn’t be surprised if there is an economic bounce back after the referendum, whatever the result.

 

Douglas McWilliams
President
Centre for Economics and Business Research
Unit 1, 4 Bath Street, London EC1V 9DX
Direct:                     +44 (0)77 1008 3652
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Email:                       dmcwilliams@cebr.com