Many companies are still cautious about investment projects, in terms of the rates of return they demand before taking them on or the period over which they are prepared to wait before recouping the cost of the capital spending.
Sudhir Junankar, an economist at the CBI, said: 'The key to promoting long-term business investment in the UK still relies to a large extent on the achievement of a more stable macroeconomic environment, with steady growth in overall demand and greater interest rate stability.'
Mr George said in a weekend newspaper interview that many firms were still looking for rates of return on investment of between 17 and 20 per cent, rather than reducing the figure to take account of the better outlook for inflation.
'Businessmen have not yet adjusted to the new climate,' he said. 'This is sad, because it means very profitable investment opportunities are missed. But I suppose I can understand that . . . It will take time for inflationary expectations to be ground out of the system. We'll reverse this attitude eventually.'
The CBI found that 40 per cent of manufacturers were demanding rates of return of 20 per cent or more, and most were looking for the same rate of return as two years ago. On average, firms were factoring an expected inflation rate of 5 per cent into their investment appraisals, above the Chancellor's short-term 1 to 4 per cent target for underlying inflation, let alone the long-term target of 1 to 2.5 per cent.
The April quarterly industrial trends survey from the CBI found that 44 per cent of manufacturers cited inadequate returns as one of the main factors limiting their investment, while 55 per cent cited uncertainty about the strength of demand. The proportion of manufacturers being deterred by inadequate returns is higher than at the same stage of the economic cycle in the early 1980s.Reuse content