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Investment set for sharp rise

Even if interest rates rise to 7.5 per cent following today's meeting between the Chancellor and the Governor of the Bank of England, the economy will continue to grow above trend by nearly 3 per cent both this year and next year thanks to a sharp recovery in investment. Manufacturing, in particular, is set to enjoy the strongest period of investment and output growth since the mid-1960s.

The forecast comes from the Centre for Economic Forecasting at the London Business School. Economists there are predicting a 6 per cent rise in investment in 1995 and a 7.5 per cent increase in 1996. This compares with the modest rise of 3.4 per cent in 1994.

The increase will be particularly powerful in manufacturing, where capital spending is set to rise by almost 15 per cent in both 1995 and 1996. LBS economists suggest that manufacturing "is on the threshold of an investment boom which should see an exceptional period of growth in industrial investment".

This boom in manufacturing investment is more than just a response to the high rates of capacity utilisation most recently shown in the CBI's Industrial Trends Survey . British industry is structurally more competitive following the elimination in the 1980s of the worst excesses of overmanning and low productivity. And thanks to the fall in sterling following Britain's ejection, industry now enjoys a competitive edge that was lacking in the late 1980s and early 1990s.