Business investment plunges but 2011 ends with some bright news

Analysts yesterday expressed alarm at a plunge in business investment as 2011 drew to a close but said the wider economy may yet avoid another recession.

Official figures confirmed earlier estimates that the economy shrank by 0.2 per cent in the final quarter of last year. The Office for National Statistics (ONS) also made a slight downward revision to the annual growth rate.

Yesterday’s second estimates showed that the quarterly fall was largely due to a slump in investment at a time when the turmoil in the eurozone was at its most disruptive.

Hide Ad
Hide Ad

But there was better news on other fronts, with the first rise in consumer spending since the third quarter of 2010 and an upsurge in exports.

Economists said the breakdown of the fourth-quarter GDP data painted a mixed picture but were broadly in agreement that growth would pick up as 2012 progressed.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting body, said the ONS figures provided both “worrying and encouraging” news.

“It was particularly alarming to see business investment plunge 5.6 per cent quarter-on-quarter and there was also relatively strong public spending growth, which clearly will not be sustained,” he said.

“But there was some decent news, with consumer spending growing for the first time since the third quarter of 2010 and by a decent 0.5 per cent quarter-on-quarter.”

Archer pointed to recent strong business survey data and forecast GDP growth of 0.4 per cent in the first quarter of 2012.

David Tinsley, UK economist at French bank BNP Paribas, said the main “downside” was the fall in business investment. Declines in business investment were fairly broadly based,” he noted, “though a 26.1 per cent drop in construction investment and a 14.3 per cent fall in ‘other production’ investment in electricity, gas and water and in mining and quarrying made the decline considerably worse than otherwise.”

Mirroring Archer’s outlook, Tinsley said he expected a rebound in business investment in the first quarter, with the UK economy avoiding a technical recession – two back-to-back quarters of contraction – this year.

Hide Ad
Hide Ad

“Perhaps the real debate to be had is whether the upturn in the data we will see in Q1 will have the legs to persist into the second half of 2012,” Tinsley added.

The ONS said Britain’s dominant services sector stagnated at the end of the year while the rise in exports – coming after two quarters of falling sales abroad – was mainly driven by trade with non-European Union countries.

Business leaders described the fall in investment over the quarter as “disappointing”, but remained upbeat.

David Kern, chief economist at the British Chambers of Commerce, said: “Although the UK economy faces many challenges, we believe it has returned to positive growth in the first quarter of the year and a recession will be avoided.”