Warning lacklustre business investment will hamper recovery

The Ernst & Young Item Club said UK business investment is lagging behind global competitors and will remain lacklustre for the next three years.

Last week the Bank of England’s monthly summary of business conditions, carried out by its network of agents, reported “very modest” prospects for business investment, as companies hoard cash or hold off expansion in the face of weak domestic demand.

Item – which stands for Independent Treasury Economic Model – said investment by UK businesses is still 15 per cent below where it was before the financial crisis.

It forecasts business investment growth of just 2.3 per cent this year and 3.9 per cent in 2013, before rising to eight per cent from 2014-16.

Item said Government should “create conditions for recovery in business investment”. It called for greater clarity over the next phase of the public sector spending cuts, as well as clearer policy in areas such as energy and environment.

“Slow and steady doesn’t always win the race,” said Andrew Goodwin, senior economic advisor to the Item Club.

“The UK is facing another two years of sluggish growth in business investment, sapping strength from the wider economy.

“The fundamentals are all in place, but a lack of corporate confidence is holding back major spending decisions and is now hampering UK growth and the rebalancing of the economy.

“There’s a risk that a lengthy period of under-investment could also damage the supply side of the economy and reduce our productive potential.”

Item said the recovery in business investment has been much weaker and slower than after previous recessions. It calculated that if the recovery in investment had occurred at the same pace as the 1979 cycle, GDP would now be 1.2 per cent higher.

It argued that lack of finance is not behind weak business investment. While credit conditions for small and medium-sized firms remain tough, Item said larger firms dominate investment spending and still have good access to bank funding, as well as their own substantial cash holdings.

Private non-financial companies are now holding deposits worth over £729bn, about 47 per cent of GDP, it said.

Mark Gregory, Ernst & Young’s chief economist, said: “The desired rebalancing of the UK economy towards a more export-oriented model is now, at best, on hold.

“Without capital investment, British businesses won’t be able to develop the products nor build the capabilities necessary to create the competitive advantage that is required to penetrate new markets successfully.”