Slump in business investment hits recovery hopes

As the deficit row rumbles on, businesses certainly don't seem very confident about the recovery...

Last Updated: 31 Aug 2010

A sobering statistic from the Government this morning: business investment slumped to £27bn in the fourth quarter of 2009, according to the ONS, almost 6% less than the previous quarter. To put this into context, that means companies spent 24% less on stuff like new machinery, new computers and new offices than they did during the same quarter in 2008 – the biggest year-on-year drop in more than 40 years. Doesn’t exactly smack of an economy about to haul itself from recession into recovery, does it?

In some ways, the decline doesn’t come as a big surprise – with companies desperate to preserve cash, lots of big spending projects were postponed or even cancelled altogether in 2009. Sure enough, this meant investment plummeted across the board. Worst-affected was the manufacturing sector (both private and public), where it was down a teeth-gritting 35%, but there were also big drops for the services sector (down 31%) and construction (down 22% on last year, or 54% from the start of the recession).

However, it’s the size of the declines that have spooked economists – particularly in a quarter that supposedly saw the UK emerge from recession (‘truly dire’ and ‘horrible’ were just two of the reactions today). Although these figures won’t directly affect the revised GDP figure due out on Friday (which measures output, not spending), it does paint a rather gloomy picture of current business confidence – which in turn suggests that we’re unlikely to see last quarter’s growth figure of 0.1% adjusted upwards (quite the reverse, if anything – although to be fair, this is an election year).

More significantly, it will certainly constrain output in the future, because businesses are going to have a hard time producing strong growth without investment. We already know that whoever wins the election, we’re going to see some big cuts to public spending – whether they start in 2011 as per Labour’s plan, or in 2010, as per the Tory plan (Shadow Chancellor George Osborne hit back last night, reiterating his promise to make a start - ish - this year). Since public spending has been the big driver of GDP growth in recent years, the Government is clearly hoping that business will pick up the slack instead. But judging by these figures, any kind of investment-led recovery still looks a long way off.

In today's bulletin:

RBS faces bonus backlash as losses hit £3.6bn
Slump in business investment hits recovery hopes
British Gas feels the heat as profits jump nearly 60%
Ganging up to get a better deal
Turn up the heat with corporate speed-dating

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