Recession fears re-surface after fall in business investment

There was a shocking collapse in business investment in the second quarter, according to figures released by the Office for National Statistics. Spending collapsed 18.4 per cent year on year to £29.9bn in the period, the biggest yearly drop since records began in 1965. Quarter on quarter the decline was 10.4 per cent, the second worst ever.

Economists were startled by the poor numbers and warned that they would be likely to lead to a downward revision in second quarter gross domestic product (GDP) later today from the current estimate of -0.8 per cent to over one per cent. Businesses have been struggling with profitability in the downturn, but there were warnings that lack of spending now will mean problems for both companies and the UK as a whole in the future.

After the release the pound slipped to a six-week low against the dollar and a two and a half month low against the euro. Investors worried that the government would be forced to inject more cash into the economy, worsening the state of the UK’s finances.

There was better news on growth in the US, however. US GDP shrank at an annual rate of one per cent in the second quarter, which was a better performance than analysts had expected and provided evidence that the recession is beginning to recede. In spite of the increased optimism surrounding the figure, it was a record fourth quarterly decline in a row.

WHAT THEY ARE SAYING: David Kern, chief economist at the British Chambers of Commerce, in the Daily Telegraph: "The further sharp decline in business investment signals serious threats to Britain's long-term recovery. In the face of weak demand and mounting financial pressure, businesses have little choice but to cut investment and stock. Unless this trend can be reversed, the long-term productive capacity of the economy will be damaged, and the country will lack the necessary capital stock to sustain a recovery. This must be kept in mind when the government plans a fiscal strategy to repair the public finances. It is critical not to impair the business sector's ability to invest and create wealth."

Jonathan Loynes, chief European economist at Capital Economics, in the Independent: "The fact that this is the second big drop in business investment in a row is a concern, so whilst some areas of economic activity are showing signs of stabilising, other areas continue to fall very sharply." ·