New orders in the building industry fell by more than a quarter in the final three months of last year, suggesting a sharp deterioration in business investment that is likely to cut deeply into the UK economy this year.

Construction orders were down by 26 per cent, but the fall was even greater when a jump in volatile infrastructure orders was excluded, figures from the Office for National Statistics show.

While much of the past year’s decline has been in the housebuilding sector, as house prices plunged, a quickening drop has been seen in orders for commercial and industrial property.

Commercial construction orders fell by more than 40 per cent in the final quarter, compared with a year earlier, following a 27 per cent drop in the previous three months – the largest quarterly fall since records began in 1983. Orders for industrial building fell by 36 per cent, compared with a 13 per cent decline in the third quarter.

The sharp decline in private development outside housing is a reflection of the fall in commercial property prices, tighter lending standards and slack demand for new space. But the dwindling plans for new buildings underline the deepening cuts in business investment, which are likely to be an even bigger drag on the economy this year.

The Bank of England’s inflation report this week found “marked falls” in business investment in late 2008. This is likely to worsen. The industrial trends survey of the CBI employers’ body shows investment intentions for plant and machinery in early 2009 at their weakest since the survey began in 1958.

Michael Saunders, an economist at Citigroup, expects a 25 per cent drop in business investment in 2009 – more than three times the decline in the worst year of the 1990s recession. Cuts in business investment “are going to be a major contribution to the depth of the recession”, he said.

Construction companies exposed to private sector spending are feeling the impact of falling investment. In November, Waterman engineering announced a hiring freeze and restrictions on capital spending.

Malcolm Paul, group finance director of WSP, a design engineer, said 10 per cent of its UK workforce was working on overseas jobs because of lack of domestic demand. “For projects that rely on bank funding in this country, the market is very, very dead indeed,” he said.

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