Collapse in UK business investment raises fears for recovery

Business investment has collapsed to its lowest level in more than five years, raising fears that the UK will not be able to take advantage of a global economic recovery.

Spending by companies in the three months to June fell at an annual rate of 3.5 per cent to £26.8bn - the smallest total since the first quarter of 1998 - according to government figures published yesterday.

The fall was triggered by a 10.1 per cent decline in manufacturing investment, which is the steepest drop since records began in 1994.

The data came as the Confederation of British Industry slashed its forecasts for economic growth this year - to 1.8 per cent from 2.1 per cent - as well as next year - to 2.3 per cent. These figures are well below the predictions made by the Treasury in April's Budget.

The CBI warned that the failure to invest now would make it harder for the UK to make up the ground when global demand reignited.

Ian McCafferty, its chief economic adviser, said: "Business investment, on which so much of the recovery depends, is going to remain sluggish." He said it was "understandable" firms had cut spending in the face of falling rates of return, continuing cost increases and the need to make greater pension provisions.

As a result of weaker growth the CBI believes the public finances will plunge £28bn into the red in the current financial year and £32bn in 2004/05. The Treasury has pencilled in £27bn and £24bn respectively. Despite the shortfall, the CBI, which is still smarting from the unexpected hike in national insurance payments last year, said there was no need for further tax rises in next year's Budget.

"Because of the surpluses built up in the early part of the cycle there's no need for anything in terms of taxation immediately," said Mr McCafferty. "The issue for taxation arises when you come to the next economic cycle."

Stephen Radley, chief economist for the Engineering Employers' Federation, said the fall in business spending was "another nail in the coffin" for the Treasury's forecasts.