Britain’s firms to invest cash piles at long last

Tim Wallace
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BUSINESS investment is set to bounce back in the UK this year, the European Central Bank (ECB) forecast yesterday.

Firms have been cautious since the financial crisis, holding back cash instead of investing while they wait and see when the recovery kicks in.

They have also been hampered by a lack of support from banks who withdrew credit in the crisis.

But now banks are recovering and businesses have more access to credit from other sources like capital markets, the ECB said.

As the recovery takes off, this should lead to a surge in investment.

“Non-financial corporations seem to have been able to use market-based funding when loan growth turned negative. More recently, business surveys have improved in the United Kingdom,” said the ECB.

“This, together with the comfortable cash balances held by UK companies, suggests that the preconditions for an investment recovery are in place.”

However, the ECB did say there will be some factors slowing the economy in the medium term.

Although the government has tried to act to reduce its deficits, the central bank said more is needed.

Households too are not yet done deleveraging to reduce the burden of debts built up in the boom years either, and so will be constrained by that legacy.

“The relatively weak household real income dynamics and the ongoing need for private and public sector balance sheet adjustment will continue to constrain domestic demand for some time, while prospects for export growth remain subdued,” the ECB’s report said.

Another slight bump to investment may be rising interest rates. The Bank of England has said it will begin considering a rate hike when unemployment falls to seven per cent – a level it could reach in the coming year.