Investment falls at its fastest rate since mid-2009

In the Autumn Statement in December the Chancellor said business investment was 'rising strongly'

Chancellor George Osborne (PA)

Business investment fell at its fastest quarterly rate for five years in the three months to December, raising fears that companies are sitting on their cash piles despite the economic recovery.

The Office for National Statistics (ONS) reported that investment by companies dropped 1.4 per cent in the final quarter of the year, largely as a result of falling expenditure by the oil and gas industry in the face of collapsing oil prices.

That was the biggest quarterly decline since the second quarter of 2009, when business investment plunged by 5.1 per cent. And it followed a 1.2 per cent fall in the third quarter of the year.

In the Autumn Statement in December the Chancellor said business investment was “rising strongly”. The quarterly level of investment is now back to where it was in the middle of last year.

Howard Archer of the economic analyst IHS Global Insight called the figures a “major disappointment” and said that as well as the energy effect, companies might be holding back on spending due to pre-election uncertainty.

“The weakness of fixed investment was a surprise because the UK’s recent strong economic growth should have supported profit margins, enabling companies to buy in capital goods such as machinery and equipment,” said Zach Witton of the risk-management consultant Moody’s Analytics.

But other economists said investment was likely to bounce back this year. “Two consecutive falls in business investment are disappointing for sure, but they do not mean the upturn in capital spending is now at an end,” said Rob Wood of Berenberg Bank.

“Conditions remain propitious for investment. Extremely low interest rates, entrenched growth and continued, solid confidence bode well… while political risks to investment are overplayed.”

Samuel Tombs of Capital Economics said that although oil companies had slashed spending, there was no evidence of a “wider malaise”.

Total GDP growth in the fourth quarter was confirmed by the ONS at 0.5 per cent, meaning the overall economy grew by 2.6 per cent in 2014. The breakdown of contributions to that growth from the ONS showed a continuing reliance on household consumption, which provided 1.3 per cent of the total expansion – double the 0.7 per cent contribution of business investment.

Net trade dragged GDP down by 0.5 per cent over the 12 months. But the breakdown for the final quarter was more promising, showing net trade contributed 0.6 per cent of growth, double the 0.3 per cent from household spending.