After what has been the longest period of depressed activity since the great depression, the recovery in the UK is finally gaining some real traction. GDP is estimated to have grown by 1.8% in 2013, which is the strongest annual performance since the start of the financial crisis in 2007. Recent survey data also remains very positive and suggests that this momentum has been carried into 2014.
However the Bank of England’s February inflation report makes clear that much of this increased activity to date is attributable to a rebound in consumption, as pent up demand is released and that this has occurred despite negligible growth in consumers’ labour income. Bank of England Governor Mark Carney has also made clear that the key to making up ground lost since the financial crisis will be a meaningful increase in productivity. Business investment therefore has a key role to play both in boosting productivity and also in ensuring the sustainability of the recovery.
The Independent Economists Group noted that investment appeared to have been especially weak not just during the recovery, but also in the years preceding the financial crisis. Despite a recovery in 2013 for example, business investment last year was still over 12% lower than in 2008 and has been stuck at that level for much of the intervening period. Moreover this was despite the observation that many businesses were characterised by strong balance sheets and large net cash reserves.
Clearly part of this weakness reflected cyclical factors, especially concerns about insufficient demand in the face of significant amounts of spare capacity. The current downturn has also been exceptional in terms of the pressures placed on firms’ financial resources and a protracted period of uncertainty associated with the fiscal problems in the US and the euro area. Uncertainty about the timing and durability of the recovery has undoubtedly weighted on investment. Equally it was acknowledged that pressures within the financial system, more often than not at the behest of the regulator, had contributed to pressures for firms to deleverage. However it was felt that the impact of these factors was now significantly reduced and that this is increasingly reflected in the official data which now indicates that business investment has increased in the last four consecutive quarters. The Group also noted that there was a now significant divergence between gross and net lending figures.