LONDON (Reuters) – The protracted process of Britain’s exit from the European Union has caused side-effects on the domestic economy to intensify, Goldman Sachs (NYSE:) said on Friday, pointing to dwindling company investment.
Capital expenditure by businesses has been particularly subdued, the bank said, and strong employment figures mask a misallocation of UK company resources to labor rather than capital which will ultimately hurt productivity.
Since the referendum, firms have hired workers rather than invest in capital, Goldman Sachs economists said.
“The misallocation of resources looks to have deepened.”
An increasingly tight labor market – with unemployment at its lowest since early 1975 and pay growing at its joint fastest pace in over a decade – could thus be a sign of strain rather than resilience.
“The balance between weaker demand for workers and a shorter supply of workers bears the hallmarks of a Brexit-induced labor market shock,” the economists said.
Low investment combined with a tight labor market are likely to “accentuate the chronic underperformance of UK productivity,” they added.
Goldman Sachs maintained its view that Britain is likely to leave the EU with a modified version of the current withdrawal agreement, but said that until Brexit is resolved it is hard to see a strong rebound in growth.
Next year could see a pick-up in activity as uncertainty fades, the bank added, but “the persistence of the structural headwinds facing the UK economy is likely to take longer to address.”
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