Business investment slide hints at 'unbalanced' UK economy

THERE was a sharp decline in business investment in the last quarter of 2005, bringing investment growth for the full year to just 1.6 per cent.

The Office for National Statistics reported that total business investment dropped 1.0 per cent in the three months to January and was just 0.3 per cent higher than the same time the year before, leading City experts to suggest the figures highlighted how the UK economy was becoming increasingly unbalanced, with an ever-greater dependence on consumer spending to support economic growth.

In theory, higher business investment allows demand in the economy to grow faster without stoking inflation. In turn, this curbs the pressure for rate hikes. A fall means the potential of falling inflation and weaker growth.

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Howard Archer, chief UK economist at Global Insight, described it as "extremely disappointing" and said the level of business investment was "pretty unimpressive", given the overall strength of corporate profitability in 2005, low long-term interest rates and a healthy equity market.

John Butler, HSBC's chief economist, said uncertainty over the outlook for the economy and therefore future profit levels, combined with pension deficit worries were constraining investment.

"According to business surveys, profit expectations across both service and manufacturing companies are at their lowest rate since 2003," he said. "Profit and demand uncertainty are a bad environment in which to invest

"Also it seems more than a coincidence that companies have increased their annual contributions to pension schemes by almost 20 billion a year, 2 per cent of GDP, but investment has remained subdued," he added.

The figures lend credence to the growing band of economists who believe the Bank of England's projections on growth are too optimistic. The Bank believes a modest acceleration in investment and a resurgence in consumer spending will help the economy recover strongly in 2006 with growth moving above trend by the end of the year.

This analysis was reflected in the decision to leave interest rates unchanged at 4.5 per cent for the fifth month running in February. Stephen Nickell was the only member of the Bank's rate-setting monetary policy committee to vote for a cut.

GDP figures for the fourth quarter of 2005 are due this morning.

UK workers were less productive than their counterparts in other countries, including France and the United States, official figures showed today. Workers in this country were 27 per cent less productive than in the US, according to the ONS.

Germany's productivity was the same as in the UK, although the figures for this country, covering 2004, were better than in Japan.