2014 the year of the investment revival?

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Investment has been one of the stand-out features of the economic recovery to date, but unfortunately not in the way we would have liked. Instead of the quick bounce back in investment that was forecast coming out of the recession, investment has continually fallen short of forecasts. More recently we have seen some signs that things might start to change.

  • Companies are seeing order books, on balance, improve and the overall UK economic environment has strengthened,
  • Some companies still hold relatively large corporate cash balances,
  • There are signs that credit conditions have been improving which suggests that there may have been some improvement in the appetite to lend (although as yet we have not seen any movement in net lending), and
  • Manufacturers' investment intentions have picked up strongly throughout the course of last year and most companies indicate they are planning to invest in 2014

So given this strong potential for business investment recovery, how strong might this recovery actually be?

According to our Executive Survey 2014, manufacturers' investment plans reflect the UK growth outlook – one of moderate or largely maintenance investment in the UK. There will likely be some overseas investment but most is likely to come from large companies.

EEF's central forecast is for business investment to contract in 2013 followed by a return to growth of 6.0% in 2014, which is in line with this moderate pick up in investment intentions. However, we do see both upside and downside risks to this forecast although actual investment in the past couple of years would suggest downside risks are more prominent.

We modelled the effect of investment coming in both above and below our central forecast.

The Investment Scenarios

Weaker investment scenario

Credit conditions remain tight and businesses continue delaying their investment plans resulting in no business investment growth in 2013q4 then a more modest recovery in business investment of 2.1% and 3.4% in 2014 and 2015 respectively.

The impact on forecasts: GDP growth pulled down to 2.2% per annum in 2014 and 2015.

Stronger investment scenario

The stronger domestic outlook leads to business investment being half a percentage point stronger in each quarter than our central forecast from 2013q4 to 2015q4 with investment growth boosted to 7.7% and 9.0% in 2014 and 2015 respectively.

The impact on forecasts: Slightly stronger GDP growth of 2.5% in each of 2014 and 2015.

These scenarios are illustrated in the chart below.

UK growth sensitive to investment recoveryContributions of business investment growth, % annual change in GDPSource: Source: EEF and Oxford Economics

Investment will be an important factor in sustaining the signs of economic recovery we have seen over the past couple of quarters, especially if we are to see better balanced growth.

Author

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