Business investment grew sluggishly in the third quarter, official figures showed, confirming survey evidence that British-based companies are cautious about capital spending even though profit levels are high.
The Office for National Statistics reported that the volume of business investment rose by 0.3 per cent in between July and September, compared with the previous quarter. It was 1.9 per cent up on the third quarter of 2004.
The more rapid 1.5 per cent quarterly growth in business investment seen in the second quarter has petered out.
The continued slow growth of business investment will further delay the elusive rebalancing of the British economy from consumers expenditure to investment and net exports. 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.
Just as in other European countries, companies have decided to save most of the money they have been making rather than risk investment in new opportunities to generate profit in the future. The reluctance of companies to invest when interest rates are low and the return on the existing capital stock is high has puzzled economists for some time.
The monetary policy committee said in last week’s inflation report that its regional agents had observed a weakening of investment intentions which “may also reflect uncertainty about the near-term outlook for the economy in the face of sluggish consumer spending and higher energy prices”.
It forecast investment would “continue to increase at a moderate pace” over the next two years as “the economy is likely to gather momentum”.
A more worrying possibility has been highlighted by the CBI employers’ organisation and by opposition politicians in recent months.
They have suggested that higher taxes and regulations have contributed to the weakening of business investment intentions in Britain, despite the high returns enjoyed by companies on their past investment.
Gordon Brown, in his last Budget, forecast that the volume of business investment would grow this year by 4.25 to 4.75 per cent. There is no chance that this figure will now be achieved. Given the pattern of business investment over the past seven quarters, a growth rate of about 3 per cent is now much more likely.
Howard Archer of Global Insight said the latest figures were a cause for concern since “corporate profitability seems likely to ease back from the very strong levels seen in the first half of this year”.
The figures will not directly influence the revised third quarter gross domestic product numbers, due to be published on Friday, as they will still largely be based on evidence about output in the economy, not expenditure by households, companies and government.
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