September 28, 2018 / 8:36 AM / 18 days ago

UK firms cut investment as Brexit nears, current account gap widens

LONDON (Reuters) - British companies cut their investment in the second quarter of 2018, when Brexit was less than a year away, and the country’s balance of payments shortfall grew more than expected, official data showed.

People walk by the River Thames across from the financial district of London, Britain, September 23, 2018. REUTERS/Henry Nicholls

The Office for National Statistics confirmed a previous estimate that Britain’s overall economy grew by a quarterly 0.4 percent in the April-June period.

But it lowered the annual growth rate in the second quarter to 1.2 percent from a previous estimate of 1.3 percent.

It also cut the quarterly growth rate in the first three months of the year, when the country was hit by heavy snow, to 0.1 percent from 0.2 percent.

Economic growth in the first half of 2018 was the weakest for a six-month period since the second half of 2011, the ONS said on Friday.

Sterling fell after the data and briefly touched its lowest level in nearly two weeks against the U.S. dollar.

“Although it has picked up a little from a slow start to the year, underlying economic growth remains persistently below the long-term average,” ONS statistician Rob Kent-Smith said.

The ONS has already published its estimate for GDP growth for the three months to July, which showed the economy running at its fastest pace in nearly a year, helped by hot summer weather and the World Cup, which encouraged consumers to spend.

Ruth Gregory, an economist at Capital Economics, said the weak picture of the economy in the first half of the year, combined with the uncertainty about Brexit, meant the Bank of England was unlikely to raise interest rates again until May, after Britain’s scheduled departure from the EU.

INVESTMENT FALLS

The revised figures published on Friday suggested companies were taking a cautious approach before Brexit.

Business investment fell 0.7 percent in the second quarter compared with the first — a sharp reduction from a previous estimate that investment grew by 0.5 percent — and was down for the second quarter in a row.

“Investment is being tightly controlled with spend directed to keeping things going but not to expansion. UK is going to lose out on future growth,” Mark Gregory, chief economist at accountants EY, said on Twitter.

The ONS said the fall was driven mostly by reduced investment in machinery and buildings.

In annual terms, business investment was also down, falling 0.2 percent for the first decline in a year and a half.

The Bank of England has previously said business investment in Britain should be growing strongly with the world economy expanding quickly, and it links the weakness to Brexit uncertainty.

A survey published earlier on Friday said one in five British companies would move at least some of their operations to the European Union in the event of a no-deal Brexit.

The ONS also said Britain’s balance of payments shortfall got bigger, hit by the country’s wider trade deficit.

The difference between money flowing in and out of the country was negative by 20.3 billion pounds ($26.5 billion) from April to June, bigger than a deficit of 15.7 billion pounds in the first quarter, the ONS said.

The shortfall was also bigger than a median forecast of 19.4 billion pounds in a Reuters poll of economists.

As a share of GDP, the deficit rose to 3.9 percent, up from 3.0 percent in the first quarter and was the biggest in a year.

Bank of England Governor Mark Carney has warned that Britain’s large current account deficit left it reliant on “the kindness of strangers”.

That could be a risk as the country prepares to leave the EU in March with no clarity yet on whether it will smooth its exit with a transition period.

Writing by William Schomberg, editing by Larry King

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