ALEX BRUMMER: Business drives UK growth

Resilience is becoming a common word when it comes to the UK economy. But despite the rising tax burden and fourteen interest rate increases since December 2021, the economy continues to defy expectations.

Boosted by business investment, the latest manufacturing data revised up growth in the first quarter to 0.3 percent from 0.1 percent, confirming a 0.2 percent increase in the three months to June.

It may not be gangbusters, but it lifts Britain’s 1.8 percent growth rate since 2019 above France’s, and leaves Germany’s performance since the pandemic in the dust. Labor has dug a hole for itself by claiming that Britain is at the bottom of the G7 growth league.

Critics will point to stronger results in the US. Both Donald Trump and Joe Biden embarked on a campaign of fiscal largesse unlike anything seen since the New Deal in the 1930s. That’s why Washington entered the weekend under the threat of a government shutdown. Moreover, the propensity of US consumers to spend their Covid-19 savings is stronger than in Europe, as recent work from the European Central Bank shows.

The most striking aspect of the expansion in Britain is the continued rebound in business investment, which has increased to 4.1 percent from 3.4 percent in the second quarter.

This may be partly a response to Rishi Sunak’s ‘double deduction’ for capital investments, which ended on March 31.

But we should not forget that Jeremy Hunt replaced this with a full write-off of investment costs as a sweetener for the rise in corporation tax from 19 percent to 25 percent. Over the year to June, business investment rose 9.2 percent, an impressive increase from 6.9 percent. The trade clearly still has confidence in Britain, as evidenced by recent new aerospace commitments from Jaguar Land Rover, BMW, Nissan and BAE.

It is difficult to maintain production momentum given the headwinds of budget issues and higher mortgage and financing costs. It’s not all gloom here either. Housing, a key driver of consumer spending in Britain, is under pressure. Nevertheless, mortgage lending was surprisingly good in August and the number of mortgage applications has decreased, but has not fallen.

A healthier economy will send the Office for Fiscal Responsibility back to the drawing board before the autumn statement. The downing and changing in Downing Street has not helped Britain’s reputation.

But it has not hindered a much-needed revival of business investment.

China syndrome

Sherard Cowper-Coles is stepping down as HSBC’s corporate chief after off-hand comments about Britain being ‘weak’ in curbing relations with China. As an experienced diplomat with an impressive track record in the hotspot of Afghanistan and the tech metropolis of Israel, he should know better.

The paradox is that HSBC continues its pivot into China. As a bank, it prefers to be sotto voce in its relations with China, placing the relationship in a context that goes back centuries rather than the past decade.

Western economies and the International Monetary Fund nevertheless find Beijing difficult. Nothing illustrates this more clearly than the impasse over a rescue operation for Sri Lanka. The country’s GDP has plummeted by 9 percent in the past year. A plan for a $300 million emergency IMF loan, which was supposed to be implemented on September 27, fell apart due to Beijing’s stubbornness.

The financing was conditional on Sri Lanka’s debt restructuring, which would require China to implement a cut in official loans, which the country has refused to do. India is willing to take up some of the slack. But China now views New Delhi as a real regional rival.

As poverty increases in Sri Lanka and the country teeters on the precipice, geopolitics reigns supreme.

Saharan heat

Unreconstructed climate change activists are not interested in the idea that licensing the Rosebank oil field near Shetland will strengthen Britain’s energy security as the country moves towards net zero. The government is following a two-track approach. This is symbolized by the decision to go full steam ahead with a plan to bring solar and wind energy via submarine cable from the Moroccan Sahara to Cornwall.

The project, developed by former Tesco boss Dave Lewis, would provide enough power for 7 million homes and meet 8 percent of the UK’s energy needs.

Given the devastating recent earthquake and ahead of next month’s IMF meeting (OCT) in Marrakesh, the timing could not be better.