Investment slump inflicts long-term damage on economy

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The collapse in business investment will permanently damage Britain's economic performance, economists say.

Reacting to the latest official figures on business investment, which show a further sharp decline to a 40-year low, City analysts agree that the reduction in the national stock of capital will have a serious long-term impact on Britain's ability to create wealth.

From a quarterly peak of £37bn in 2008, investment is now down to £27bn: as a proportion of national income, it stands at its lowest since the 1960s. This means that while the growth rate may recover, there will be a once-and-for-all cost to the nation, a "step change" in the rate of economic growth.

The Office for National Statistics said that business investment fell less than previously reported in the fourth quarter of last year. The previously estimated drop of 5.8 per cent has been revised up to 4.3 per cent, and this has also boosted hopes that GDP growth will soon be revised upwards, from its current reading of 0.3 per cent. Nevertheless, business investment is down about 27 per cent since the start of the recession.

In his Budget the Chancellor revised down his growth forecast for next year, from 3.5 per cent 3.25 per cent, with no compensating increase predicted for future years.

Howard Archer, the chief economist at Global Insight, said: "The sharp overall decline in business investment suffered so far may well have already had serious damaging repercussions for the economy's potential output, not only through capacity being lost but also through companies not investing in the latest, most efficient technology and processes."

The quarterly fall in investment was most dramatic in the construction sector, mired in recession. The building trade cut investment by 21 per cent, with reductions of 5 per cent in manufacturing, and 7.2 per cent in services. The ONS also reported that expenditure on research and development in 2008 was flat compared to 2007.

In his Budget the Chancellor doubled the annual investment allowance to £100,000, and offered increased relief on business rates for smaller companies. Surveys by the CBI and the Bank of England suggest that investment intentions may be marginally improving.

For the British Chambers of Commerce, David Kern, its chief economist, said: "In the face of weak demand and severe financial pressures, businesses have had little choice but to cut investment and stocks. This situation cannot go on indefinitely without damaging consequences. Unless investment picks up, the UK economy will lack the capacity to meet rising demand when the recovery gathers momentum."