Last updated: February 25, 2010 10:58 pm

Weak investment data damp recovery hopes

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Investment by businesses fell steeply in almost every sector in the final quarter of last year, damaging hopes that the UK can return to robust growth in coming years.

Investment, which includes everything from spending on new machinery and IT to construction of new buildings, fell by 5.8 per cent on the quarter in the final three months of the year to £27bn, compared with an expected rise of 0.1 per cent. That compares with a 1.8 per cent decline in the third quarter.

Business investment was down by 24.1 per cent on the year – by far the biggest year-on-year fall in more than 40 years, aside from a one-off blip in 2006. Manufacturing investment is down 36 per cent over the year and down by 30 per cent in the service sector.

The sharp declines, even as the economy appeared to leave the recession in the fourth quarter, are likely to raise concerns about the extent to which the availability of credit is hitting companies, as well as whether the recovery in the UK will prove sustainable.

“The substantial fall in business investment in the fourth quarter of 2009 is a horrible surprise and extremely disappointing,” said Howard Archer, economist at IHS Global Insight.

“The recovery still seems to be on pretty shaky ground,” said Vicky Redwood of Capital Economics.

The fall threatens to undermine the supply side of the economy, which could reduce the economy’s ability to produce growth and potentially boost inflationary pressures.

While part of the explanation may be that companies are struggling to access credit, the Treasury points out that only 20 per cent of investment is debt financed. Most investment is undertaken by the largest companies, which are less likely to have been hit by credit restrictions.

“The problem is poor credit availability as well as the inevitable desire by companies to rebuild balance sheets and cut debts,” said Michael Saunders, economist at Citigroup.

The figures have no direct impact on revised fourth quarter gross domestic product data reported this morning, because national income estimates rely on output figures rather than spending numbers.

Although investment numbers are frequently heavily revised, the weak tenor of the data may suggest that the economy was suffering more in the final quarter of 2009 than initially estimated.

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