The prospect of Britain exiting the EU is not only weighing on the UK currency – the London Interbank Offered Rate for the pound sterling is about 20 percentage points lower than on the day of the Brexit vote – but also on investors looking for a deal.
Eighteen months ago, the UK was ranked as the most attractive investment destination in the world by business executives participating in EY’s Global Capital Confidence Barometer survey. In the latest edition of the twice-yearly survey, released this week, the UK has dropped to the seventh most attractive investment destination in the world.
Of the more than 1,700 executives EY surveyed in 45 countries, the majority (57%) planned an acquisition in the next year – to pursue higher growth, stay competitive, and take advantage of fast-paced innovation in technology and automation. Nearly half of the respondents (49%) reported having five or more deals in their acquisition pipelines, up from 20% six months ago and 12% a year ago.
The US is expected to benefit most from the deal activity. In the fall of 2016, the US remained the top investment destination, a rank it had gained a year earlier. China came in second, and Germany, Canada, and France moved up and into the top five.
The UK’s attractiveness to investors is declining as economic growth is projected to weaken in the country, economists suggested.
“So far it might look like the economy is taking Brexit in its stride, but … sterling’s shaky performance … provides a timely reminder that challenges lie ahead,” Peter Spencer, chief economic advisor to EY’s forecasting group the ITEM Club, said in a statement. EY Chief Economist Mark Gregory added that “the holidays are over, and businesses are now looking hard at plans and budgets. Both investment and hiring plans are likely to be squeezed in the current environment.”
The value of all the finished goods and services produced in the UK in 2016 is projected to increase by 1.9%. The projected GDP growth is supported by strong consumer spending and very low inflation, but in 2017 consumer spending is expected to slow considerably and inflation is expected to rise, according to the EY ITEM Club.
Also, uncertainty around the UK’s future relationships with the EU is likely to reduce corporate confidence in 2017 for a second year in a row. EY forecasts the UK GDP to grow 0.8% in 2017 and 1.4% in 2018.
Executives’ view of the global economy is more upbeat. Fifty-four per cent of the respondents in EY’s fall 2016 survey considered the state of the global economy as stable; 22% viewed it as improving.
As the top five economic risks, respondents listed:
- High volatility in currencies, commodities, and other capital markets (32%)
- Domestic and regional political stability, including the rise in populist parties (29%)
- Global geopolitical instability, including terrorism and territorial disputes (16%)
- Slowdown in global trade, including economic nationalism and protectionism (11%)
- Unexpected rapid slowing of growth in China (7%)
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.