UK business investment falls ahead of EU referendum

[May 26, 2016]  By Ana Nicolaci da Costa and William Schomberg
 
 LONDON (Reuters) - Business investment in Britain fell in early 2016, a sign that uncertainty caused by the country's impending referendum on European Union membership is weighing on companies.

Growth in the economy slowed to 0.4 percent in the January-March period, the Office for National Statistics confirmed on Thursday, and many economists said it might lose further momentum in the second quarter.

Business investment fell in annual terms for the first time in three years, depressed by weaker spending on offices and other non-residential buildings. Weak trade figures again dragged on growth, leaving consumers as the economy's drivers.

The services sector, which makes up 80 percent of the UK economy, showed signs of losing steam.

The Bank of England has previously said uncertainty hanging over the June 23 referendum was crimping investment, especially in the commercial real estate sector where transactions dropped 40 percent in the first quarter of this year.

Chris Hare, an economist with Investec, said the figures might suggest that a lot of the economic slowdown derives from concerns around the referendum, something which could lift quickly if the country votes to stay in the 28-nation EU.

"But the downside risk is that more of the slowdown relates to underlying weakness," Hare said.

The ONS said the economy grew by 2.0 percent versus a year ago, below expectations that the data would confirm an initial estimate of 2.1 percent annual growth in the first quarter.

Business investment was weaker than expected, slackening by 0.4 percent year-on-year in the first quarter after rising 3.0 percent in the fourth quarter of last year.

Business investment also declined compared with the fourth quarter although the 0.5 percent decline was less steep than a 2.0 percent fall between October and December 2015.

The government in recent weeks has stepped up its warnings of the risk of Britain leaving the EU, and the Bank of England recently said a Brexit could tip the economy into recession.

Workers are seen in office windows in the financial district of Canary Wharf in London November 3, 2015. REUTERS/Kevin Coombs

World leaders and international organizations from U.S. President Barack Obama to the International Monetary Fund have echoed these concerns.

Earlier this month, the heads of 15 major international companies that are major investors in Britain, including GE, Cisco, Mars and Airbus, called for Britain to remain in the EU and said future investment decisions could be affected by a decision to leave the bloc's single market..

The BoE earlier this month cut its economic growth forecast for this year to 2.0 percent from 2.2 percent and also stepped up its warnings on the economic risks of Brexit.

The economy grew 2.3 percent in 2015, the ONS said.

Household spending rose by 0.7 percent in the first quarter, picking up a bit of speed from late last year.

Consumer spending has been the main propellant of Britain's recovery from the financial crisis and policymakers have said they want to see greater investment by businesses to secure a more balanced economy.

In another sign of the slowdown, output in the services sector fell 0.1 percent in March, its first decline since August of last year.

(Editing by Mark Heinrich)

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