U.K. Investment Stymied by Pressure to Make Investor Payoutsby
One third of firms underinvested over last five years: survey
BOE paper says findings indicate ‘environment of impatience’
British companies aren’t only discouraged from investing by the cost or availability of loans. They’re also under pressure to generate higher returns and profits to shareholders.
New research by the Bank of England published Wednesday found that 80 percent of public firms that had underinvested over the past five years agreed that pressure for short-term returns to shareholders had been an obstacle to investment.
A significant proportion of privately-owned businesses in the survey also said financial market pressures were an obstacle, suggesting an “environment of impatience that favors returns today over the equivalent value of returns tomorrow.” Even among family firms, some may feel the need to match the returns that they can gain by deploying the money elsewhere, according to the report.
One third of the 1,220 businesses that responded to the November survey judged that they had invested too little, based on their own assessment. Hurdles included a reduced access to credit, constraints on internal resources, greater risk aversion and uncertainty about the economic environment as well as financial market pressure.
“Unfortunately there seems to be no silver bullet,” BOE Deputy Governor Jon Cunliffe said in a speech presenting the data in Birmingham. “Any policy initiative to address under investment would need to address a wider agenda than just constraints on external financing.”
Weak investment is one of the challenges facing BOE policy makers amid forecasts of slower growth as the U.K. begins its process of exiting the European Union.
Cunliffe said Brexit is damping spending and the BOE’s forecast for the level of investment in three years is about 20 percent lower than it was before the referendum. The central bank kept its key interest rate at a record-low 0.25 percent last week.
“In the near term, in the bank’s latest economic forecasts published last week, business investment is expected to remain very weak before picking up,” Cunliffe said. “This weakness is consistent with survey indicators of investment intentions which remain subdued and elevated uncertainty.”
Even so, U.K. growth has proved unexpectedly resilient since the Brexit referendum. It beat expectations again in the fourth quarter, expanding 0.6 percent, driven by largely by services and consumer spending.