Productivity gap grows as investment slumps

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Government plans to boost the health of the UK corporate sector suffered a double blow today from figures showing business investment had slumped to a historic low while the productivity gap had widened.

Businesses cut investment spending by 1.0 per cent in the final quarter of last year to leave annual growth of just 0.3 per cent, the Office for National Statistics said. At the same time it said the productivity gap between Britain and the US widened sharply in 2004, and against all other G7 nations except Japan.

In nominal terms the share of business investment in overall GDP is the lowest since data began in 1965, prompting warnings it could damage hopes of a strong economic recovery.

Analysts said the poor performance was a surprise, coming at a time of low interest rates, available credit, strong profitability and a series of government initiatives to boost investment.

Michael Saunders, an economist at Citigroup, blamed the need to fill large pensions deficits, the high ratio of corporate debt and fears of fresh tax rises on business were stopping managers from investing. "We expect business will remain sluggish in the coming couple of years," he said.

Sources at the Treasury warned that the data tended to be revised upwards. One said it was possible investment was being delayed by uncertainty over energy prices and could rebound as stability returned.

Alan Clarke, a UK economist at BNP Paribas, said: "That helps to explain why the manufacturing investment suffered in the fourth quarter."

Other analysts said it lent credence to the view held by Stephen Nickell, the member of the Bank of England's Monetary Policy Committee who voted for a rate cut this month, that its investment forecast was too optimistic. Howard Archer, the chief UK economist at Global Insight, said: "The decline in business investment highlights just how dependent UK growth prospects are on a sustained improvement in consumer spending."

The ONS said sharp falls in manufacturing, production, construction and distribution services had outweighed a rise in the wider services sector. Manufacturing suffered an annual slump of 8.3 per cent while services rose 2.5 per cent.

ONS data also showed the average UK worker was 27 per cent less productive than their US counterpart in 2004 - 3 percentage points worse than 2003.

The Conservatives said the figures were a "double whammy" for the Chancellor. "Gordon Brown is not preparing Britain to compete in the global economy," said George Osborne, the shadow Chancellor. "The Chancellor described productivity as the fundamental yardstick of economic performance and he is fundamentally failing on his own measure." The Treasury declined to comment.

John Philpott, the chief economist for the Chartered Institute of Personnel and Development, said the productivity figures would make "sober reading" for Mr Brown. "Were these figures to include 2005 it is likely they would show the UK lagging further behind the US than... in 1997."

The TUC said that countries where people worked shorter hours had a better productivity than the UK.