(Bloomberg) — Chancellor of the Exchequer Rishi Sunak’s plea for businesses to boost investment highlights a key weakness in the UK economy that company executives have long complained about.
Britain has fallen behind other advanced economies in the Group of Seven when it comes to the amount businesses are investing in everything from research and development to improving technology and equipment.
The gap has widened since the vote to leave the European Union and is one of the issues holding back the long-term growth potential of the UK economy. Sunak this week vowed to cut taxes to spur investment. While that won’t do much to address the cost-of-living crisis hitting consumers, it’s an idea embraced by business executives.
“He has a very good point,” John Browne, the former chief executive officer of the oil major BP Plc, said in an interview. “We need to invest more in innovation and more in R&D. Industry is not spending enough. The balance is too much government spending.”
Business investment is crucial because it increases productivity, which also is lagging in the UK. Boosting it would help Prime Minister Boris Johnson deliver on a pledge to lift living standards in poorer parts of the country under his “levelling up” agenda.
The debate comes at a critical juncture both for the government and executives. Many UK companies are sitting on significant cash piles after pausing dividends and capital investment plans at the height of the pandemic.
Many management teams are now choosing to return much of this surplus cash to shareholders, rewarding their patience after a tough two years of intermittent lockdowns amid a global supply chain crisis and surging inflation.
Buybacks vs Investment
Businesses including Burberry Plc and Compass Plc and most of the large banks have announced significant share buybacks in recent weeks. Oil company BP Plc’s decision to boost its share repurchase program means that FTSE 100 companies are now collectively planning an all-time high of 37 billion pounds of share buybacks this year, according to AJ Bell.
It’s not just the big banks and oil companies returning cash either, according to Adrian Gosden, investment director at GAM.
“I have in my fund some small companies that are also buying back their shares because their shares are valued at maybe half times their asset value. So why not?” Gosden said.
Recommendations
The CBI, Britain’s biggest employers group, has called on Sunak to stimulate investment by cutting taxes in a way that will encourage businesses. The lobby group notes that the allowances tax authorities grant for offsetting capital investments is much less generous than in other countries, especially the US.
“We will need to ensure that there is economic growth in the pipeline to avoid any downturn in our economy that could worsen or prolong the cost-of-living crisis,” CBI Director General Tony Danker said. “It will ensure that any firm pausing on investment now, will be bold, decisive and back their original plans.”
UK investment has suffered a series of blows in recent years. The uncertainty created by Brexit, the pandemic and the cost-of-living crisis means that firms are spending no more than they were seven years ago, and less than at end of 2019 — just before the pandemic struck. Business investment is around 10% of GDP in the UK, the lowest of any Group of Seven nation.
In 2021, Sunak introduced an incentive that hands firms 25 pence off their tax bills for every £1 they spend on qualifying plant and machinery. The so-called super-deduction was expected to supercharge investment as companies released billions of pounds of cash accumulated during the pandemic to take advantage of the tax break before it expires in 2023.
The Office for Budget Responsibility, the independent body that oversees forecasting for the government, in March predicted a 10.6% surge in investment, making it a key driver of growth this year. The Bank of England had been even more bullish in its assessment a month earlier.
A criticism of the super-deduction is it will merely bring forward investment, only for firms to rein in spending when it no longer available. In fact, companies face a double hit next April. On the day the allowance ends, the tax rate on corporate profits is due to jump by 6 percentage points, part of Sunak’s efforts to bring down government borrowing.
Companies want a permanent replacement, and the Treasury has opened a consultation about how to reform the capital allowance regime to “drive and sustain growth” into the future.
“Simple actions such as expanding the scope of business rate relief to help more companies, such as those in the automotive sector, would enable more businesses to invest and grow,” a spokesman for the carmaker Aston Martin in a written response to questions.
With the economy facing a possible recession, the war in Ukraine disrupting supplies and trade tensions escalating between Britain and the EU, doubts are growing over whether investment will get the boost that had been anticipated.
Earlier this month, the BOE trimmed its forecast for this year and said it saw almost no investment growth in 2023. Meanwhile, the CBI this week said manufacturers had scaled back their plans for investment in plant a machinery and expect to reduce spending on buildings.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
