UK: THIS SHOULD BE THE YEAR OF AN INVESTMENT RENAISSANCE. - Capacity constraints are beginning to imperil recovery.

Last Updated: 31 Aug 2010

Capacity constraints are beginning to imperil recovery.

The upswing in the UK is three-years-old. With capacity constraints now beginning to bite, there are doubts about whether it will see its fourth birthday without a sharp rise in inflation. Concern centres on corporate investment which, as the chart shows, is well behind compared to its performance at the equivalent stage in the last cycle. Indeed, it has barely risen at all so far. In the US, investment has played an important part in the recovery. Here, the CBI reports a sharp increase in the number of firms citing capacity constraints as a factor limiting output. Further, a significant number of firms are looking to raise prices rather than output in coming months. Clearly, stronger investment is now needed if manufacturing is to continue to play an important role in the current cycle.

There are early signs that the picture may be about to change for the better. For example, three major car manufacturers have recently announced plans to invest a total of £500 million in the UK. True, this is part of an ongoing renaissance in the domestic car industry, but conditions for stronger investment are also falling into place elsewhere. Most important, improved profits have boosted cash flows across industry, enabling firms to pay down debt and rebuild their balance sheets. Now that this process is largely complete, capital expenditure is likely to be given greater priority. Schroder Economics is looking for an increase in real business investment spending of 10% in 1995, as against virtually no increase last year.

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