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Concerns over weak economy resurface

Lower investment and higher stockbuilding at the tail-end of 1995 renewed concerns about the weakness of the economy. But the financial markets shrugged off worries about the impact of the beef scare on Government borrowing, bidding more than two and a half times over for pounds 3bn-worth of gilts auctioned yesterday.

Total investment fell slightly in 1995 as a whole. This was due mainly to an 11 per cent drop in investment by utilities, mining and quarrying. Manufacturing investment rose 8 per cent, the highest rate of increase since 1992.

Economists said the figure was disappointing following the extremely high profits growth of the previous year. Firms had used the earnings to pay higher dividends and take over other companies rather than invest in new equipment or buildings.

Revised figures for investment and stocks showed that the decline in investment spending in manufacturing at the end of last year was not as steep as the 9 per cent originally estimated. However, it still fell by 5 per cent in the final quarter, returning to its end-1994 level.

The outlook for industrial investment this year is not encouraging. Profits are now increasing at a far slower pace, and the company sector returned to financial deficit for the first time in nearly three years at the end of 1995.

Levels of stocks were revised up, showing a total increase of just over pounds 1bn at 1990 prices in the final quarter. Ratios of stock levels to output in manufacturing reached their highest level since the start of 1993.

"Manufacturers are carrying too much raw material, too much work in progress and too many finished goods. It is quite alarming," Ian Shepherdson, an economist at HSBC Markets, said.

Despite the disappointing economic figures, financial markets were reassured by the gilts auction's success. Demand for the short-dated stock exceeded the pounds 3bn on offer 2.64 times. The "tail" - the gap between the highs and the average price - was only 4 basis points.

The Treasury yesterday published its second annual Debt Management Report, setting out the Bank of England's task in financing government borrowing in the new financial year. It forecast a financing requirement of pounds 35.6bn - the target pounds 22.4bn public sector borrowing requirement plus redemptions, which in 1996/97 will amount to pounds 11.5bn.