Boosting business investment

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Since the financial crisis there has been broad agreement that the UK needs a new model of growth; one based on more trade and investment and less reliant on consumption by households and government. Through the stop-start recovery so far, there have been few signs that this process of economic rebalancing has really started to get underway.

Next week's Autumn Statement must signal that the government recognises its role in this process. There is little government can do to influence the more uncertain prospects in the global economy, which are weighing on export demand and confidence to make new investments. However, it can, and must, take steps to offset these external factors by making the business environment as favourable as possible to those companies looking to invest and grow in the UK.

Over the next three days a number of external contributors to our blog will set out why government should be focusing on boosting business investment and putting some ideas forward on how this can best be achieved.

But first a quick summary of the UK's past and present business investment performance.

1. UK investment has some catching up to do

As a share of output the UK has historically not compared well with other developed countries on investment. And in contrast to the pick-up in investment levels noted in Germany, the US and Canada (not shown) since the end of the recession, the investment recovery in the UK has been stuttering. While the most recent GDP data for the UK in the third quarter point to some quarter on quarter growth, business investment has made a positive contribution to total economic growth in only two of the past six quarters.

Business investment as % GDPSource: OECD

2. Recovery has fallen short of expectations

This is not where we thought we'd be at this point in the recovery. Back in June 2010 The Office for Budget Responsibility had pencilled in strong year-on-year increases in business investment making positive contributions to growth through the forecast period (chart on the left); the recovery was expected to get underway during 2010 being maintained through 2011 and 2012, with investment levels returning to their pre-recession peak during 2013. It was thought that corporation tax cuts and low interest rate would support the recovery. However, as of 2012q3 business investment was still 12% below it's pre-recession peak and on an annual basis investment isn't set to provide a meaningful boost to growth until 2013 (EEF forecast on the right).

contributions to GDP growthSource: OBR and EEF

3. In manufacturing at the least, investment intentions have picked up strongly

Across manufacturing the intention to increase capital spending has been evident since the end of the recession in 2010. EEF's Business Trends Survey saw a much more marked rebound in investment intentions in this recovery companies with the previous two recessions. The long lags between output turning a corner and investment getting underway following previous recessions impacted on manufacturers' productivity relative to competitors and manufacturers and their supply are looking to invest to ensure that can succeed in new markets and sectors both now in the medium-term. Government can play a role in addressing some of the reasons this isn't happening.

% balance of change in investment intentionsSource: EEF Business Trends Survey

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Chief Economist

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