Business spending slumps at record rate - but GDP revised upwards

The amount companies are investing has nose-dived. Does this spell disaster for the economy?

Last Updated: 31 Aug 2010

More bad news for the Treasury: business investment in the UK shrank by a whopping 10.4% in the second quarter, its steepest decline in 24 years. What’s more, the year-on-year comparison makes for even more dismal reading: investments fell 18.4%, the biggest drop since records began in 1966. The figures prompted analysts to suggest second-quarter GDP figures would have to be revised down as a result – as well as providing further proof that Alistair Darling’s recovery predictions earlier this year were just a tad optimistic. But the good news for the Chancellor was that the GDP figure has actually been revised upwards...

The cuts in investments were widespread, with no area of business escaping unscathed: budgets were slashed across the board, from computers, to company vehicles and building work (non-essential, we hope). It’s no surprise that a lack of bank credit is constraining firms’ ability to spend. But the extent of the decline has taken even the City by surprise – economists were expecting an infinitely more palatable quarterly drop of 3.6%. Whereas in fact, business investment has dropped more in this downturn than during the grim recessions of the 70s, 80s or 90s. Ouch.

Unfortunately, this could be bad news for all of us (and not just because you’ll be hard pushed to get that company car upgrade this year). If businesses aren’t investing in new kit – whether that be new factory equipment or IT systems or even office space – they won’t be able to ramp up quickly once the downturn is over. And that’s going to have a major impact on the economy’s growth over the next couple of years.

Some thought the first implications of this would be seen in the official GDP numbers, out this morning; the worse-than-expected investment data led economists to speculate that the decline would actually be more than the previous estimate of -0.8%. However, much to general surprise, the figure has actually been revised upwards to -0.7% (and the year-on-year figure up from -5.6% to -5.5%). A fairly marginal change, but at least it's in the right direction. Meanwhile house prices also jumped by 1.7% in July, the biggest monthly rise since mid-2004 (albeit from a low base, and based on a relatively small number of deals).

Nevertheless, according to the Financial Times, the International Monetary Fund reckons the UK is likely to suffer a more acute decline in growth levels in the years to come than the Eurozone, the US, Japan, Canada or Sweden. And we’ve already seen France and Germany return to growth, while Britain’s battered economy limps behind. So Gordon Brown’s claim that the UK was best-placed to withstand a global recession is still looking pretty hollow.

In today's bulletin:
Business spending slumps to record low - but GDP revised upwards
Tory council adopts 'no frills' approach to spending
Bad day at work? Blame your colleagues
SMEs hung up on taking telephone calls
Celebrate in style, with YouTube

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