Annual Investment Allowance remains in place to allow businesses to invest: why 2021 should be a better economic year all round

AIA Finance solutions UK economy

Extension of £1,000,000 Annual Investment Allowance until 31 December 2021 is one of a number of factor that could mean the UK economy bounces back strongly next year.

We end the most challenging year in living memory, with an expectation that after a sluggish start, the economy is likely to recover some of the ground lost this year in 2021.

The question is how strong will that rebound be?

There are good reasons to believe that any growth in Gross Domestic Product (GDP) might be faster and stronger than generally predicted. Covid-19 will remain a constraint on economic activity for the early part of next year, however vaccines will gradually allow life to return to something like normal. During 2020 we appear to have learned how to balance the risk to health with the need for some social interaction and a return to work and the second national lockdown was both shorter and less destructive economically than the first. We can therefore assume that even while restrictions remain in place economic activity will be at a higher level next year than this.

The clues to the strength of any economic recovery lie in understanding that the UK economy is driven to a very large extent by consumers, and whilst business investment and government spending are important, it is the degree to which the general public spend money that will have the largest influence on economic growth. A growing economy, driven by consumer spending, should also lead to increased business investment and enable the Government, if it chooses, to maintain or increase spending though higher borrowing. So everything starts with how much we as individuals spend, and it is with this in mind that we can assess the prospects for 2021.

Employment is a good place to start and although there is bad news on the high street with thousands of Debenhams and Arcadia jobs at risk, other sectors of the economy can recover quickly. Having been starved of traditional leisure pursuits for many months it is not unreasonable to expect a big increase in activity within the hospitality sector as restrictions are lifted and this should lead to rapid job creation.

Government infrastructure spending is also expected to increase throughout 2021, which will create new jobs and other businesses remain well placed to take on new staff as consumer demand increases, particularly if our exit from the EU Single Market and Customs Union on 1st January 2021 is relatively smooth.

Figures recently released by the OECD predict that during the current year the percentage of savings to disposable income within the UK will have increased dramatically from 6.5% in 2019 to 19.4%, a bigger jump than any other major economy. With interest rates at historically low levels it is not unreasonable to expect money currently sitting in bank and building society savings accounts to find its way to shops, restaurants and hotels as soon as consumer confidence and Covid-19 restrictions allow.

Finally, The OECD estimates that the UK economy will have shrunk by 11.2% in 2020, more than any other developed country, which in itself suggests that there is great potential for a rapid recovery, particularly as the same source is predicting global growth of 4.2% in 2021.

Whilst not as big a direct contributor to GDP as consumer spending, business investment could also surprise on the upside in 2021; the Government has announced that the annual investment allowance for businesses acquiring capital equipment will remain at £1,000,000 next year which provides a big incentive to invest.

In addition, and somewhat surprisingly, The Office for National Statistics in their third-quarter GDP release last month estimated that for the first nine months of 2020 gross trading profits in the corporate sector were actually higher than for the same period in 2019, implying that funds are available to invest once confidence returns. The relatively low level of business investment in 2020 also means that that out of necessity many business assets will need replacing.

One way or another we should all be able to look forward to a happier and more prosperous New Year.

Andy MilsomAndy Milsom, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.

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