Business investment fell 1.9% in second quarter

UK business investment tumbled a further 1.9% in the second quarter, according to official figures yesterday which heightened fears that the 0.2% overall economic growth figure for the three months to June could be revised down today.

Yesterday's figures from the Office for National Statistics showed business investment fell from £36.5bn in the first quarter to £35.8bn in the three months to June 30.

This 1.9% drop followed a 1.8% fall between the fourth quarter of 2007 and the first three months of this year.

Capital Economics' Vicky Redwood noted this was the first time business investment had fallen in consecutive quarters since 2001.

The ONS said investment by the manufacturing sector tumbled 5.8% between the first and second quarters. The manufacturing investment figure of £3.53bn for the three months to June was the weakest since the third quarter of 2004.

Service sector investment in the second quarter was £26.4bn, down 2.6% on the preceding three months.

Investment by the construction and the non-manufacturing production industries of electricity, gas, and water supply, agriculture and forestry, fishing, and mining and quarrying, including oil and gas extraction, came to £4.77bn in the second quarter. This was up 2.6% on the first quarter.

The ONS estimated second-quarter growth in UK gross domestic product at 0.2% last month.

Subsequent data on August 5 revealed that industrial production had contracted by 0.8% during the second quarter - rather than the 0.5% estimated initially by the ONS - raising expectations that the overall growth figure could be revised down today.

Yesterday's business investment data were viewed by economists yesterday as another pointer to second-quarter growth being revised lower when the ONS publishes its second release on GDP for the three months to June today.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club economic think-tank, said yesterday: "Business investment, which accounts for over half of total investment, fell sharply for the second consecutive quarter in Q2 This significant fall reinforces our view that (the) GDP growth figures for Q2 are likely to be revised down from the preliminary estimate of 0.2% quarter-on-quarter growth and 1.6% annual growth."

She added: "(The business investment) numbers indicate that it is not only households who are struggling to cope with the fall-out from the credit crunch. Businesses are also finding it difficult to acquire external sources of finance as credit conditions remain persistently tight. And, as the economic gloom builds, the environment for investing is deteriorating."

The falls in business investment since the start of 2008 followed eight consecutive quarters of increase. Business investment in the three months to June was still 1.9% higher than in the second quarter of last year.

David Kern, economic adviser to the British Chambers of Commerce, said: "The fall in business investment in the second quarter of this year was worse than anticipated. It confirms that businesses are being forced to retrench in the face of the economic slowdown.

"The worsening economic pressures emphasise the need for the MPC (Monetary Policy Committee of the Bank of England) and the government to take the correct measures to counter the threat of recession."

Alysoun Stewart, head of entrepreneurial advisory services at accountancy firm Grant Thornton, said: "The process of belt-tightening has begun in earnest as business investment falls for a second quarter after a period of steady increase. Non-essential investment is already on hold for many UK businesses as costs are reined in, but on the flipside this will certainly have an ongoing negative impact on the UK manufacturing sector as a significant proportion of what is manufactured in the UK is used in the production of other goods, both here and abroad.

"We are likely to see another 12 to 18 months of falling business investment in response to economic conditions, but with this drop in investment comes the very real danger of UK businesses falling behind competing firms abroad, particularly in the fast-growing nations of the developing world."

Stewart claimed businesses with cash could now gain an edge over rivals by continuing to invest. She said: "Those business that are cash rich and have the ability to invest while others sit on their hands have the opportunity to create a clear competitive advantage through both the latest technologies and upgraded facilities and brand. "