Published: May 22nd, 2024
An analysis by Deutsche Bank has found that aggregate business investment growth in the UK has risen to levels last seen before the 2008 Financial Crisis, making it second only to America amongst G7 economies.
The findings contrast a prevailing perception that UK businesses have not been investing sufficiently in equipment, something economists say is necessary to raise worker productivity and underpin economic growth. Deutsche Bank says UK business investment has climbed comfortably above pre-pandemic levels, achieving a solid 5.5 per cent growth rate in 2023.
A note accompanying the findings said four factors are responsible for driving the new investment push. One is a shift away from investing in labor into capex.
‘As labor and skill sets have become harder to find over the last few years, and with growth in wages moving well above levels seen in the EU and USA, companies have started looking to investments in machinery as the best way shift productive capacity upward.’
Another factor is the trend to ‘re-shoring’ manufacturing capacity post-Brexit. Deutsche analysts conducted a survey which found that close to 60 per cent of British manufacturers have been steadily re-patriating their supply chains to favor domestic vendors. This change has likely added to investment levels.
Fiscal incentives are also driving change. The ‘super deduction’ scheme from Westminster for capex investments, paired with the new capital allowances program offers tax breaks to firms making big equipment purchases.
Westminster is also investing directly in equipment and facilities. Deutsche found that government spending in these areas rose substantially during the pandemic and is still above pre-COVID levels.
In November of last year, an analysis Barclay’s said economic indicators showed the UK economy was outperforming the Bank of England's (BoE) most recent outlook.
Just one month on from the BoE’s last set of forecasts in November, Barclay's said all the central bank’s core assumptions are already proving to be too pessimistic.
The upbeat economic signals that have emerged since suggest that the UK’s central bank, which has held interest rates at elevated levels for longer than investors were expecting, might have been able to anticipate more robust performance.
Bank analysts said that if Britain’s economy continued on its current path, BoE policymakers ‘can expect more criticism in the coming weeks’.
The Bank’s core assumptions (referred to as ‘conditioning assumptions’ in its forecasts), have determined its GDP and CPI forecasts, which have both moved significantly upward in the past 30 days.
The Bank of England’s November 2023 Monetary Policy Report had the Bank Rate averaging as much as 5.1 per cent next year. Barclay’s said investors were starting to challenge all G10 central banks by looking for a 4.8 per cent rate in 2024.
Forex traders had been raising their bets for interest rate cuts at the BoE and other major central banks in recent weeks. Some were targeted more than others, as evidenced by the Euro’s dip following a surge in speculative positions based on expected rate cuts by Frankfurt.
Barclay’s analysis pointed to easing money market pricing and looser financial conditions in major Western markets. The evidence, they said, could be found in the number of UK debt products being priced in forward swaps.
The bank noted that GBP had performed better than expected, with trade-weighted Pound Exchange rates two per cent higher at 82. That could soften the impact of imported inflation in 2024 as un- favorable currency hedges from Q4 2022 were closed.
In June 2023, forex traders were increasing speculative bets on the Pound, believing it was set to strengthen against a backdrop of rising positive sentiment.
Data published this week by the US Commodity Futures Trading Commission (CFTC) shows that bullish positions on GBP rose by USD 3.2 billion in the seven days leading up to Wednesday, 21st June.
There was significant growth in 'long' contracts, with 37,110 new positions indicating growing optimism in the UK currency's prospects.
A ‘long’ position means a trader opens a contract based on a presumed future rise in the price of an underlying asset, in this case the asset being Pounds Sterling.
Analysts at MUFG told Reuters that speculative traders had ‘aggressively pursed net-GBP longs’ over the previous fortnight. The boost created the biggest net long position on GBP held by Leveraged Funds since September of 2022.
For the seven-day trend noted in the CFTC’s report, it was the biggest one-week jump seen since April 2016. But MUFG analysts believe the cumulative net GBP long is the biggest since 2014.
‘Traders have been slowly leaning into Sterling since April, but the jump seen last week is very significant.’
The surge in bullish Pound positions reflected a growing consensus among leveraged fund investors that the Bank of England’s shift to aggressive monetary tightening was having a positive effect on the currency.
Threadneedle Street surprised investors the week prior by raising interest rates 50 basis points, a big leap from the successive 25bp hikes seen previously.
Traders started looking for Britain’s base rate to settle at or above six per cent, meaning the UK would have the highest rate amongst G10 countries.
In May 2023, Sterling fell back against EUR and USD after publication of British Jobs print data that showed the UK's labor market had reached a seasonal inflexion point.
Average earnings had risen by 6.4 per cent in Q1, slightly below the 6.6 per cent economists were looking for, but still above April's 6.3 per cent.
Bank of England (BoE) policymakers had been watching wage data closely for indications that British inflation had become locked in. While the numbers were solid growth indicators, the BoE decided that wage increases were nearing a peak, especially when considered against rising unemployment.
