ALEX BRUMMER: Business drives UK growth

Wishful thinking: Chancellor Jeremy Hunt

Resilience is becoming an overused word when it comes to the UK economy. Yet in spite of a rising tax burden and 14 hikes in interest rates since December 2021, it continues to defy the odds.

Boosted by business investment, the latest output data revised up growth in the first quarter from 0.1 per cent to 0.3 per cent, and confirms a 0.2 per cent rise in the three months to June.

It may not be going gangbusters, but it lifts the UK growth rate of 1.8 per cent since 2019 above that of France, and leaves Germany’s performance in the dust since the pandemic. Labour has dug a pit for itself with claims that Britain is bottom of the G7 growth league.

Critics will point to stronger outcomes in the US. Both Donald Trump and Joe Biden embarked on a campaign of fiscal largesse unlike anything seen since the New Deal in the 1930s. That is why Washington entered the weekend under threat of government shutdown. Moreover, the propensity of American consumers to spend their Covid-19 savings has been stronger than in Europe as a recent work by the European Central Bank shows.

The most striking aspect of the UK expansion is the continued revival of business investment, upgraded to 4.1 per cent from 3.4 per cent in the second quarter.

This may be partly a response to Rishi Sunak’s ‘double deduction’ for capital investment which ended on March 31.

But we shouldn’t forget that Jeremy Hunt has replaced it with a full write-off of capital investment costs as a sweetener for the jump in headline corporation tax from 19 per cent to 25 per cent. Over the year to June, business investment rose 9.2pc, an impressive upgrade from 6.9 per cent. Commerce obviously still has faith in the UK as recent new commitments made by Jaguar Land Rover, BMW, Nissan and BAE in aerospace show.

Maintaining output momentum is difficult given headwinds from fiscal drag and higher mortgage and borrowing costs. It is not all gloom here either. Housing, a big driver of consumer spending in Britain, is under pressure. Nevertheless, mortgage lending was surprisingly buoyant in August and mortgage approvals, while slipping, are not plunging.

A healthier economy will send the Office for Budget Responsibility back to the drawing board ahead of the autumn statement. The chopping and changing on Downing Street has not been helpful to the UK’s reputation.

But it hasn’t crimped a much needed revival in business investment.

China syndrome

Sherard Cowper-Coles is stepping down as head of HSBC’s corporate affairs after injudicious comments about the UK being ‘weak’ in curtailing dealings with China. As an experienced diplomat with an impressive record in the hotspot of Afghanistan and the tech metropolis that is Israel, he should know better.

The paradox is that HSBC continues its China pivot. As a bank, it prefers to be sotto voce in its dealings with China and to place relations in a context that dates back centuries rather than the last decade.

Western economies and the International Monetary Fund, nevertheless, are finding Beijing troublesome. Nothing illustrates this more clearly than the stand-off over a rescue for Sri Lanka. The country’s GDP plummeted 9 per cent over the last year. A plan for an emergency IMF loan of $300m, due to be implemented on September 27, fell apart because of Beijing’s obduracy.

The funding was conditional on Sri Lanka restructuring its debt, which would require China to take a haircut on official lending, which it refuses to do. India is willing to take up some of the slack. But China now regards New Delhi as genuine regional rival.

As poverty surges in Sri Lanka and it sits on a precipice, geopolitics rules.

Saharan heat

Unreconstructed climate change activists have no truck with the notion that the licensing of the Rosebank oilfield off Shetland will bolster the UK’s energy security as the country moves towards net zero. The Government is pursuing a two-track approach. This is symbolised by the decision to press full steam ahead with a plan to bring solar and wind power from the Moroccan Sahara to Cornwall by undersea cable.

The project, being pioneered by former Tesco boss Dave Lewis, would provide enough power for 7m homes and meet 8 per cent of UK energy needs.

Coming as it does after the devastating recent earthquake and ahead of next month’s (OCT) IMF meeting in Marrakesh, the timing couldn’t be better.