November 27, 2013 9:00 pm

Rise in business investment belies underlying weakness

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Business investment has been the missing ingredient in Britain’s economic recovery. As long as companies have refused to invest in new machines, buildings and IT systems, economists have remained nervous about the sustainability of the UK’s sudden growth spurt.

So news that business investment rose 1.4 per cent between the second and third quarters, part of an overall 0.8 per cent rise in economic output, was greeted enthusiastically by some City economists on Wednesday.

Stat attack

Stat attack
BoE queries reliability of ONS business investment data

Samuel Tombs at Capital Economics, a consultancy, saw the increase as “reassurance that the recovery is beginning to broaden out”. Howard Archer, an economist at IHS Global Insight consultancy, said it was “the most welcome development” in data on gross domestic product.

A closer look at the numbers suggests it is too soon to celebrate. Total investment, of which about half is business investment, contributed just 0.2 percentage points to the economy’s 0.8 per cent growth. The rest came from household consumption and a build-up of unsold stocks within companies, offset by a drag from falling net exports.

Why is investment still so weak? Many assume “investment” is about the installation of new machines on factory production lines but, in fact, less than a fifth of total investment is on machinery and equipment. Moreover, this sort of investment spending has been remarkably stable in real terms since the data began in 1997 (though it has been falling as a share of gross domestic product).

The bulk of investment goes on new and refurbished houses, offices, warehouses and other structures. Statisticians count estate agents fees as a type of investment spending, because they are a necessary part of buying a house. It is this sort of investment that boomed before the financial crisis and has plunged in its aftermath.

But there are reasons to believe total investment should start to pick up soon. The recovery in the housing market, boosted by the government’s “Help to Buy” mortgage guarantees, should boost investment in housing and estate agents’ fees. In fact, this month’s Bank of England Inflation Report said the outlook for housing investment was stronger than it had anticipated three months earlier.

Economists do not expect homebuyers to be the only contributors to an investment recovery. “Demand is returning and paralysing uncertainty is dissipating, which should get companies out investing more, if only to initially replace clapped-out equipment rather than expanding,” says Robert Wood, an economist at Berenberg.

In a recent BoE survey, the net balance of businesses who said that uncertainty was discouraging investment was about 5 per cent, down from about 50 per cent in a similar survey a year earlier. And while small businesses are still struggling to borrow money on reasonable terms, rebounding demand should make it easier for them to spare some of their own money for investment.

Businesses themselves say they are planning to invest more. The latest forecast from the CBI business lobby group, informed by the reports of its members, is for business investment to fall 4.9 per cent over this year as a whole, and then grow 6.9 per cent in 2014 and 8.3 per cent in 2015.

Given the volatility of the official data, and the BoE’s doubts about its reliability, it is possible that investment is already recovering more swiftly than it appears. But economic history offers a note of caution about just how much to expect from Britain’s businesses. Weak business investment is nothing new in the UK: it started to decline as a share of GDP at the turn of the century and has been the second-lowest among advanced economies over the last decade. That suggests there are deeper issues, on top of the downturn, shaping the behaviour of corporate Britain.

Additional reporting by Brian Groom

. . .

Governor’s stat attack justified

Mark Carney’s recent criticism of the Office for National Statistics as being much worse than Statistics Canada was harsh, but the Bank of England believes it was fair and far from rare, write Chris Giles and Sarah O’Connor.

Though officials always stress their close working relationship with the ONS, past public assessments have often been damning. The BoE told the ONS in 2007 that it found continued difficulties in updating the national accounts “very unwelcome” and that its measurement of prices in the service sector was “deficient”.

Come 2009, the governor at the time Mervyn King told MPs that he was concerned about the level of revisions, adding: “I do think the ONS has gone through a very difficult period and they have not been well endowed with either lots of resources or people [in its new Newport home]”.

By the 2011-12 financial year, the BoE was so annoyed by the ONS that it put the statistical agency into the equivalent of special measures, officially rating it as “poor”.

Though the UK Statistical Authority no longer publishes the specific grades or comments of its government customers, current high-level concerns over the accuracy of the national accounts is evident not only from the governor, but also from the minutes of interdepartmental reviews of quarterly data.

Such is the level of concern over official figures that Kate Barker, a former MPC member, is leading a review into the quality of national accounts data, while Paul Johnson, head of the Institute for Fiscal Studies, is reviewing the measurement of inflation.

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