South East: UK has short window of opportunity, says EY

An update to EY’s UK annual Attractiveness Survey, based on interviews with 259 international companies in autumn 2016, warns that the UK has only a short window of opportunity to develop and implement policies that will maintain and grow its longer-term attractiveness to international investors. This makes it imperative that the respite offered by the stable immediate economic outlook should be put to good use.

25% of those surveyed said they intended to invest in the UK in the next 12 months, suggesting that the potential impact of Brexit has not yet had an impact on investor perceptions to a significant degree. However, the responses paint a different picture when international investors were asked how they expect the UK’s attractiveness for FDI to change in the next three years.

The proportion of investors that expect the UK to become more attractive has slumped from 36% in spring 2016 to a new low (since 2004) of 29% in autumn 2016. Meanwhile, the percentage expecting it to get worse has more than doubled, from 16% to 34%, in the same time period.

Steve Varley, EY UK chairman, commented: “There has been an improvement in short-term sentiment since May this year, but the medium-term outlook has worsened across a number of metrics and investors are concerned about how the UK’s attractiveness will develop over the next three years. The UK now has a window of opportunity to address their concerns and preserve future competitiveness.”

The UK attracted record levels of FDI in 2015. The number of projects recorded increased by 20% to 1,065, representing the steepest year-on-year uplift in the past decade. The UK took a 20.9% share of the total number of projects locating in Europe (5,083), and remained the leading recipient of FDI projects in 2015, followed by Germany, France and Spain.

Asian investors are the most positive about the UK’s future attractiveness, with 34% expecting an improvement and 26% a deterioration, although this is still significantly lower than the historic trend. European investors are the most pessimistic, with 43% expecting it to decline and only 23% anticipating an improvement.

The top four countries that investors think the UK should prioritise trade deals with, to minimise the impact of the changes in its arrangement with the EU, are: the US, cited by 61% of all investors; Germany (52%); China (48%); and France (31%). Surprisingly only 16% mentioned India. Less surprising is the fact that investors across the world are more likely to rate their own region and/or country as a priority. For example, 64% of Asian respondents stressed the importance of striking trade deals in Asia.

Investors are particularly concerned about the UK not having access to skilled labour both because of uncertain access to workers from outside the UK and because of inadequate investment in skills within the existing workforce.

The report suggests that the UK needs more alignment and integration in its trade strategy, and that the Government needs to speak with one voice.  A clear statement needs to be made of the sectors that the UK chooses to prioritise. The role of exports, FDI and overseas investment needs to be defined and policy aligned to support this.

Mark Gregory, EY’s UK chief economist said: “Once sector priorities have been identified, our discussions with investors indicate five priority action areas for the UK: developing a comprehensive approach to skills; delivering improved infrastructure; signing trade deals to preserve and grow the UK’s market access; introducing incentives to encourage investment, including taxation, support for R&D and capital equipment; all underpinned by the creation of a digital platform of both technologies and skills.

“All these initiatives should be developed at national, regional and city level, in order to ensure that trade continues to support the UK’s economic performance and that benefits are felt across the whole country.”

Manufacturing should be a focus, notes the report. Over half of all FDI projects in Europe originate from manufacturers, and each project in production in the UK is matched by an investment elsewhere in the value chain, over time. High value software FDI should also be a target, particularly those which would help build the UK’s digital platform such as AI, robotics and analytics capability.

Varley, concluded: “The UK must act now to develop its vision across major economic powers to maintain and increase the UK’s attractiveness for a post-Brexit world, at a time when economic growth is holding up much better than many forecasters expected.”