Investment stays low despite profitability
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.The profitability of British companies is at its highest since 1988, but investment is still lower than six years ago, official figures confirmed this week. Business has run out of excuses for holding back from new investment.
Despite industry's return to financial health there has been less growth in investment than usual so far in this recovery. It actually fell in the first quarter.Despite strong profits and balance sheets, there is no clear evidence that business is about to forge ahead with new plans.
The prominent exception is manufacturing. Investment spending on equipment, buildings and vehicles in manufacturing increased by 6.5 per cent last year, compared with a rise of only 3.7 per cent in total investment. But spending by manufacturers started from a low base and as a ratio of GDP was at an all-time low of 2 per cent.
Many economists now expect a boom in manufacturing investment, pencilling in a double-digit increase for this year. It is the one area of the economy where there are undisputed signs that firms are reaching the limits of their production capacity - although, with output still below its 1990 peak, it is shrunken capacity. Delivery times are lengthening and price increases at the factory gate are beginning to stick.
Surveys suggest that manufacturers plan greater investment. They also returned to bank borrowing in the first quarter, having repaid debt since the start of the recession.
Unfortunately, manufacturing accounts for only a quarter of the economy. With companies' financial surplus still close to its record, other sectors are in equally robust financial health but do not have the same pressing need to expand capacity.
Professor Tim Congdon, chief economist at Lombard Street Research, points out that the biggest component of the total is spending on construction. Part of this is housebuilding, which is obviously in the doldrums.
The rest, construction of commercial property, has been weak because the last boom left a huge oversupply. "Construction orders are the key leading indicator of investment. They are weak", he says.
He predicts that total investment will rise by only 2.5 per cent this year, even though the increase for manufacturing industry could be 10- 15 per cent.
Andrew Sentance at the London Business School is more optimistic. He says: "Profitability is one of the strongest influences on business investment."
The worry is that high profits are not a sufficient condition for investment to revive. Helen Macfarlane, an economist at ABN-Amro, says: "Companies are in a strong financial position, but they are putting higher priority on dividends and takeovers. Uncertainty about growth and sluggish consumer demand are just not good for investment prospects."
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies
Comments