Business investment for latest quarter shows signs of recovery

Business investment in Britain picked up in the second quarter after falling in the first, but the recovery was not as strong as economists expected.

The Office for National Statistics said yesterday that investment rose 0.8 per cent in the second quarter of this year (April to June) compared with the previous three months. The annual rate of investment growth eased to 7.4 per cent, having hit an eight-year high above 13 per cent in the fourth quarter of last year. Corporate spending between April and June was underpinned by the service sector. Manufacturing investment fell 5.7 per cent from the first three months, the first quarterly decline in four, the report showed. Within that, the weakness in capital expenditure in the manufacturing sector was driven by vehicles and metals components, down 14 per cent and 17 per cent respectively.

Investment fell 0.6 per cent in the first quarter after averaging quarterly growth of 3 per cent in 2006. These relatively weak figures are somewhat at odds with recent surveys of business optimism by the CBI and others.

Michael Saunders, of Citi European Economics, cautioned: "The relatively modest gain in business investment is a bit surprising, given the high return on capital and surveys showing very strong investment intentions among businesses. But, before concluding that the recent investment boom is faltering, it must be stressed that these ONS data are usually revised up over time, and that the revisions are often sizeable. It is troublesome that data quality is such an issue, but the likelihood of such revisions cannot be ignored. We suspect that business investment is probably still growing strongly and that the ONS data at some point will be revised to reflect this."

Ross Walker, an economist at the Royal Bank of Scotland, said the business investment figures, although disappointing, were unlikely to lead to a downward revision of GDP when the official numbers are published today. "Overall, growth in UK capital expenditure has seen a marked cooling in the first half of 2007, but this follows exceptionally strong investment spending throughout 2006," he added.