The hoped-for recovery in business investment failed to be sustained at the end of last year as official figures published on Thursday showed business investment contracting at its fastest rate in two years in the final quarter.

The volume of business investment fell by 1 per cent in the last three months of 2005, compared to the previous quarter. The Office for National Statistics said that for the year as a whole, the volume of business investment was £113.1bn, up 1.6 per cent on 2004, against growth of 3.3 per cent in 2004.

The figures are volatile and subject to revision - Thursday’s release contained a multitude of revisions going back to the beginning of 2005, though most of these were small and offset one another. But they will once again raise concerns about the caution of British-based companies regarding capital investment despite high profit levels.

The pick-up in growth in the second and third quarters petered out, throwing into question the rebalancing of the British economy from consumers’ expenditure to investment and net exports.

The figures illustrate the concerns of Stephen Nickell, the external member of the Bank of England’s monetary policy committee who has voted for a quarter-point cut in interest rates for the past three consecutive months, citing weak prospects for business investment as one reason why economic growth was unlikely to grow fast enough for consumer price inflation to hit the Bank’s 2 per cent target in two years time.

In its latest inflation forecasts, published last week, the MPC downgraded its expectations for the strength of recovery in business investment and Mervyn King, Bank governor, has referred to “puzzle” of weak business investment.

Business investment accounts for roughly two-thirds of total UK investment, the remaining third comprising of private capital expenditure on property and public sector capital projects.

The fall in business investment in the final quarter was across the board. Investment by manufacturing companies fell by 6.9 per cent , compared to the previous quarter and by 4.8 per cent in distribution, which includes retailing. There were also falls in construction and public corporations with only “other” services - including financial companies - showing a rise.

Vicki Redwood of Capital Economics, the consultancy said: “The fact that business investment growth has averaged just 1.6 per cent per year since 2000 could help to explain the UK’s recent poor productivity performance.”

The level of output per worker in the UK in 2004 was 9 per cent below the average of all other countries in the Group of Seven leading economies, according to international productivity figures, also published by the ONS on Thursday. It was 27 per cent below the US - the productivity leader.