Investment slump hits hopes of imminent UK recovery

Hopes that the British economy is about to pull strongly out its double-dip recession received a blow yesterday with new figures from the Office for National Statistics pointing to the biggest slump in business investment in more than three years.

In its second estimate of how the economy performed in the second quarter of 2012, the ONS said that output fell by 0.5 per cent. This was better than its initial estimate last month of a 0.7 per cent decline. The revision was due to a marginally better performance from Britain's builders and manufacturers in June than expected.

But the ONS also estimated yesterday that business investment fell over the three months by 3.2 per cent as firms cut back on spending to boost their output capacity. And much of the demand that was generated in the quarter came from companies building up their stocks, rather than selling to customers. This boost to demand will unwind at some stage as firms run down their inventories.

"Despite the slight upward revision, the UK economy's underlying picture remains troublingly weak. Moreover, the substantial contribution from stock building to even this pitiful number casts serious doubt on the widespread expectation for a significant bounce-back in the second half of the year," said Philip Lachowycz of Fathom Consulting.

The Bank of England has estimated that the Jubilee celebrations and the extra bank holiday in June knocked 0.5 per cent off growth over the quarter, which implies that output was actually flat. But the weak investment figures do not suggest that businesses are gearing up to spend their cash piles.

Some analysts said that the eurozone crisis is to blame. Andrew Goodwin, chief economic adviser to the Ernst & Young ITEM Club, said: "We appear to be seeing a repeat of last autumn with the escalation of the eurozone crisis damaging business confidence and leading firms to postpone investment plans."

The figures confirmed that British consumers are also continuing to cut back, with spending by households sinking for the second quarter in a row, dropping 0.4 per cent. A worsening trade position meanwhile knocked 1 per cent off the economy. Exports over the three months were flat and imports rose by 1.4 per cent.

The chief economist of Deutsche Bank, George Buckley, said the figures underlined how weak Britain's recovery was in comparison with its major economic rivals. Spending by UK households is still 6.3 per cent below its pre-recession peak – the worst performance of the G7 economies.

Investment is still 20.1 per cent off its previous high, the worst of all the G7 nations except Italy, where spending is 20.4 per cent lower.

Mr Buckley added: "There's a lot of uncertainty in the global economy and there's nothing worse for investment than uncertainty. We've also got an output gap, so why would you be spending on new machinery when you've got things laying idle?"

Despite the upward revision to production and construction output, the ONS confirmed that the UK's dominant services sector shrank on the quarter, declining by 0.1 per cent.

In response to the GDP figures, a Treasury spokesperson said: "Britain is dealing with some very deep-rooted problems at home and a very serious debt crisis abroad, and that is why the healing of the economy is proving to be a slow and difficult process. Compared to two years ago the deficit is down, inflation is down, and there are more private-sector jobs."