Conviction that the economy is picking up is growing. The question this raises is whether there is enough spare capacity to meet the increase in demand. Capacity utilisation in manufacturing remains very low. Moreover, it has fallen in the recent past. As the chart shows, only 27% of manufacturing firms are now at or above capacity. However, when capacity utilisation and employment fell during the last recession, widescale scrapping of plant and equipment left the economy badly placed to cope with the upturn when it came. Imports rose and the balance of payments deteriorated. Will history repeat itself? Schroder Economics believes not. Capital spending, they say, has picked up earlier. Manufacturing investment is now nearly 8% above the low point reached in the first quarter of last year. A robust upturn in investment is now forecast based on three factors. First, the increase in capital allowances announced in the Autumn Statement. Second, that profits have held up during the recession. (Intense labour shedding has meant that profitability - and hence expected return on investment - remains strong.). Third, overseas pressure, particularly from some countries in the Far East, may have created an 'invest or die' attitude in industry.
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