It used to be that rebalancing the economy was a bit of a theme for policy makers. Back in 2010 the Chancellor spoke of a "gradual rebalancing of the economy, with business investment and exports playing a greater role and government spending and debt-fuelled consumption a smaller role."
A lot of attention was given to last week's National Accounts revisions (including here), which showed a couple fo things. Firslty the double-dip didn't happen after all. And secondly the economy still has even more lost ground to make up to get back to pre-recession levels of output.
Investment recovery revised away
However, the revisions (and some changes to ONS methodology) reveal something more worrying - levels of business investment are not recovering and they are now a third below where they were in 2008q1. Indeed any evidence of a business investment recovery has been revised away and over the past year it has fallen quarter on quarter.
Business investment 2008q1=100
..and so has any signs of economic rebalancing
While a lot has happened since the OBR published its first set of forecasts in 2010, back then it had anticipated a strong rebound in business investment such that is should be back to pre-recession levels this year, or thereabouts. Investment was also expected to be making the strong positive contribution to growth that the Chancellor was talking about in 2010 too.
However, there is a stark difference between those expectations and how things have turned out.
Expected rebalancing - then and now
So what has happened to business investment since 2009 and is a recovery imminent?
- In manufacturing, according to EEF's Business Trends Survey, investment intentions picked up quite strongly throughout 2010 and 2011. While uncertainty at home and abroad will inevitably have led some companies to put these plans on ice, a lack of business confidence on its own doesn't seem sufficient to explain the post-2009 investment profile.
- Access to finance is also likely to be in the mix. While the bulk of investment is committed by large companies, tight credit conditions have place constraints on SMEs investment plans with tentative signs of a turnaround only recently emerging in the Bank's Credit Conditions Survey. In addition cash for investment is also being chipped away at by other commitments - such as pension liabilities.
- A third explanation is the location of investment - companies may have plans to invest, but for some the balance of that investment is taking place outside the UK. EEF's Invest for Growth report showed that in the past three years 28% of manufacturers had invested significantly more overseas than in UK operations rising to nearly two in five for larger companies.
If cash and certainty are key to a future turnaround, we are set to see only a gradual improvement in the short term, not the 10% growth rates we were hoping for at this point.
Government has taken some action - mainly through the tax system i.e. corporation tax cuts and a temporary increase in the Annual Investment Allowance - which should make a difference to some companies in getting decisions over the line.
Less positively, some areas of debate, for example on possible policies on tax avoidance and where the UK's relationship with Europe goes from here, will not have helped make the case for more investment to take place in the UK, particularly for foreign-parented companies.
A more consistent approach to supporting rebalancing right across government is now more essential than ever.