Total UK Business investment, slow recovery from 2009. (seasonally adjusted, Current Prices)
Source: ONS Q3 2012
An unconvincing recovery in business investment.
But still, business investment increased by £1.3 billion (4.5 per cent) when compared with the third quarter of 2011.
The outlook for business investment remains muted:
- Despite low interest rates, banks are maintaining strict lending criteria and rationing finance. Many small and medium sized firms still state finance is difficult to come by.
- Prospects for economic recovery are poor. The Bank of England’s latest inflation report painted a gloomy picture of an economy struggling to post positive economic growth.
- With more austerity to come, business and consumer confidence is low.
- Some reduction in producer price inflation has increased the profitability of business investment. However, commodity prices are volatile and there is no guarantee this low input inflation will continued.
- Euro-zone debt crisis and EU recession also weigh heavily on UK investment decisions.
Public Sector Investment
Net public sector investment has been squeezed in 2012/13 by the government’s austerity policies.
Importance of Investment to the Economy
(Some notes for A level Students)
1. Impact on Aggregate Demand (AD=C+I+G+X-M)
I (investment) accounts for around 16% of total domestic demand. A rise in investment can help to promote higher Aggregate Demand. In a depressed economy, increased investment can also trigger a positive multiplier effect. With investment creating knock on effects to related industries.
2. Impact on Aggregate Supply (LRAS)
Net investment will increase the productive capacity of the economy and enable higher long run economic growth. If investment is efficient, it can increase the productive capacity of the economy. Without necessary investment, the economy is more likely to experience supply constraints, and it will lead to a lower long run trend rate of economic growth.
- It depends on other components of AD. With Consumer spending and exports weak, a boost in I could have a significant impact on increasing AD.
- It depends on the quality of investment. If banks are stricter with lending requirements, firms may have to focus on projects which offer best return – but equally, good projects may not occur simply because of market failure in credit markets.
- Both business and public sector investment is important. Business investment is main driver of private sector expansion. But, business also need public sector investment to finance infrastructure improvements such as transport.
- Investment at ONS