The British economy may not have emerged from recession after all, if the worst fears of economists are confirmed.
Exceptionally weak business investment data – the worst since records began in 1967 – suggest that the minimal 0.1 per cent expansion declared by the Office for National Statistics on 26 January may not be a true reflection of conditions in Britain's enfeebled economy.
A further economic setback would call into question both the Government's record and opposition calls for more urgent action on the budget deficit. However, for technical reasons the revelation that the UK never left recession after all – and is in an "L-shaped" recession – may not in fact be recognised until June this year, when a more substantial re-examination of the figures is undertaken by the statisticians: The GDP data revision to be published today may actually reveal a stronger figure, adding to the general confusion surrounding this vital statistical series.
The difference arises from the different methods of measuring the national income. Early estimates measure output, while later figures also take account of expenditure data. The currently depressed investment series are an expenditure item and not fully counted in the overall GDP numbers for many months. By contrast recent industrial output data will be accounted for today, and that looks stronger than it did before.
But even if the investment numbers do not push GDP back into negative territory, they are discouraging in themselves. The ONS estimates that business investment fell by 5.8 per cent in the last quarter of last year, and even that was shielded by higher public infrastructure expenditure – private sector investment dropped by 8.3 per cent.
Not only do such results threaten what the Governor of the Bank of England, Mervyn King, this week called a "nascent" recovery, they also jeopardise the longer-term growth prospects for the economy. Traditionally, investment boosts a nation's productive potential, and fosters innovation and higher productivity. The 27 per cent decline in investment since the start of the recession may have left Britain with a permanently impaired trend growth rate.
Colin Ellis, an economist at Daiwa Securities, said the figures were "shocking", but added: "Today's data are consistent with no upward revision to headline GDP growth of 0.1 per cent – although we would not rule out the possibility of changes in either direction."
The latest data also suggests that the rebalancing of the UK economy away from consumption and towards investment may be proceeding more slowly than had been hoped. A strong rebound in retail spending was recorded by the CBI distributive trades survey in February, a reflection of January's poor weather and the hike in VAT. Andy Clarke, the chairman of the CBI Distributive Trades Panel, and chief operating officer of Asda, said: "Retailers don't think February's growth spurt will be matched in March. While retailers see some growth ahead, the road to recovery through 2010 is likely to be fragile. Worries about the economy and upcoming pay freezes are likely to ensure that shoppers remain cautious."
The GfK/NOP consumer confidence index also saw an improving trend.
David Miles, an external member of the Bank's Monetary Policy Committee, acknowledged the challenges facing policymakers: "There are still more risks of growth not recovering to more normal levels than of substantially exceeding it. And around the most likely outcome for inflation – which moves from well above the target to below it – there are on balance more upside than downside risks."Reuse content