Item says weak investment will persist till 2015

Ben Southwood
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BUSINESS investment will be stuck below its pre-crisis peak until at least 2015 because of weak confidence, Item forecasted this morning, calling for the Comprehensive Spending Review to be brought forward to give businesses more clarity over future spending cuts.

Firms will increase investment spending by just 2.3 per cent across the whole of 2012, the Ernst and Young-sponsored economics consultancy said, and growth will only increase to 3.9 per cent next year. Though Item expects growth of around eight per cent between 2014 and 2016, even this rapid growth will only bring spending in 2015 back to where it was before the recession – some seven years later.

“Slow and steady doesn’t always win the race,” said Andrew Goodwin at Item. “The UK is facing another two years of sluggish growth in business investment, sapping growth 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.”

The report noted that big firms – who do most of the UK’s investment – were sitting on cash, and could access credit, implying a tight funding market was not to blame for low capital spending.

Instead, one explanation was the substitution of labour for capital that firms were engaging in, holding down the amount of capital available per worker, and thus productivity. “There is a risk that a lengthy period of underinvestment could damage the supply side of the economy and reduce our productive potential,” warned Goodwin.