UK recovery under threat from lack of investment by businesses, report warns

British business is caught in an investment freeze that threatens to slow the already fragile economy, a survey shows today.

Fewer than a fifth of businesses plan to boost investment for growth in the next six months, according to the Lloyds TSB Commercial Business in Britain report.

Weak domestic demand and rising costs have put pressure on profits and confidence among the 1,800 businesses surveyed, leading to a slight fall in investment appetite from January's already weak figure, the twice-yearly survey reveals.

John Maltby, managing director of Lloyds TSB Commercial, said: "With domestic demand in the doldrums, and confidence still muted, it is understandable that firms are worried about investing for the future.

"But the fact is that if businesses do not invest it could damage an already fragile recovery and result in even slower growth."

The gloomy data come ahead of this week's GDP figures, which economists predict will be grim reading and could even see the economy slipping back into negative territory. Increased business investment is a major requirement if output is to strengthen from the stagnant position of the previous two quarters.

Tuesday's first estimate of output in the second quarter "is likely to make very disappointing and worrying reading," according to Howard Archer, chief UK economist at IHS Global Insight.

"While we estimate that the economy grew by just 0.1 per cent quarter-on-quarter in the second quarter, we are worried that even this projected poor performance could turn out to be too optimistic.

"Economic activity clearly took a significant hit in April from the extra public holiday resulting from the royal wedding, but the softness of the economy runs deeper than this."

Multiple pressures on the economy include public spending cuts, high inflation, weak consumer spending and a slowing housing market. Activity may also have been knocked by the eurozone crisis.

The Lloyds survey found confidence up slightly from the start of the year at 15 per cent but still below the 21 per cent level of a year ago, tying in with the slowing economy and uncertainty over the effects of the Government's austerity measures.

Rising sales and stable order books have contributed to the outlook but confidence is held back by pressure on profitability.

Businesses have boosted prices since January, with 36 per cent charging more and 18 per cent making reductions.

The resulting 18 per cent balance is the highest in three years and a similar number plan more rises. The increases followed through on plans to increase prices since the last survey in January.

However, companies are not expecting higher profits in the next six months after recent falls. Margins are being squeezed by the high cost of raw materials and energy.

Businesses that export are faring better than those that rely on British sales. However, recent trade figures indicated that net trade could have turned negative in the second quarter.

Expectations for export sales are at their highest since 2004 while poor domestic demand is seen as the biggest threat to their business by 56 per cent of companies, according to the research.