U.K. Business Investment Seen at Pace Damping Economic Growth

U.K. business investment will grow by an estimated 2.3 percent this year and 3.9 percent in 2013, a pace that’s “hampering” economic recovery, as companies delay spending decisions, according to the Ernst & Young ITEM Club.

Business investment, forecast to advance a further 8 percent from 2014 to 2016, won’t return to previous peak levels until 2015, the London-based economic forecasting group said in a report published today. Investment fell 24 percent between the end of 2007 and the end of 2009, it said.

“The recovery in U.K. business investment has been poor,” the ITEM Club said. “The fundamentals are all in place, but a lack of corporate confidence is holding back major spending decisions and is now hampering U.K. growth and the rebalancing of the economy.”

Companies are deciding against committing to lengthy investment projects amid uncertainty over future returns, with little evidence that a lack of access to finance is responsible, the report said. After 18 quarters, investment is 15 percent below its peak in the U.K., compared to 7 percent for the U.S. and Germany, the ITEM Club said.

There’s as much as a 25 percent probability that one or more countries will default in the euro area and that is affecting business confidence, the ITEM Club said.

“The degree of uncertainty appears to have promoted a culture of risk aversion which spreads beyond capital spending,” according to the report. Merger and acquisition activity that’s highly correlated with investment also fell this year, it said.

Private non-financial corporations removed 65 billion pounds ($104 billion) from the country’s economy last year, according to the ITEM Club. Greater clarity on government spending cuts will lower “uncertainty” and help companies plan operations, according to the report.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE