UK may not have emerged from recession after all
Official figures on investment could mean the feeble 0.1% growth in the UK economy at the end of last year could turn out to have been negative when the number is revised tomorrow
Until today the City was reasonably confident there would be an upward revision in GDP figures tomorrow - but those hopes have been dented. Photograph: Jason Hawkes/Getty Images
Forget a double dip. Britain may not have emerged from recession in late 2009 after all. Government figures released this morning showed a dramatic 6% fall in business investment in the final three months of the year, which all other things being equal would shave 0.5 points off output. Given that the initial estimate of growth in quarter four 2009 was just 0.1% , that's not good news.
The even worse news is that a catastrophic 24% drop in investment over the past year leaves the economy in an enfeebled state as it attempts to recover from the deepest and longest recession since the 1930s. This, remember, is a recovery that is supposed to based on a rebalancing of growth from consumption to investment and exports. Fat chance, on the basis of today's report.
Let's start with what the figures mean in the short term. On Friday, the Office for National Statistics publishes its first revision of gross domestic product in the fourth quarter of last year. The ONS has three stabs at calculating how well the economy did, because it takes time for data to roll in.
Up until this morning, the City was reasonably confident that there would be an upward revision tomorrow, not least because manufacturing did rather better in late 2009 than originally believed. That hope was dented by today's figures, with analysts now hedging their bets about whether the revision will be up or down.
One bit of good news for the government is that investment only tends to show up in the ONS's third estimate of growth, which will be published next month. As a result, it is unlikely that tomorrow's data will show a sharp drop of 0.3% or 0.4% in activity during the fourth quarter. The respite, though, will be temporary unless the other fresh data coming is strong enough to offset the drag from investment.
It's worth remembering, also, that there were exceptional factors boosting growth in the fourth quarter of 2009, in particular the incentive for consumers to bring forward purchases of big-ticket items before the end of the VAT holiday. That was consumption borrowed from early 2010, so the portents for the first quarter of this year are not exactly brilliant either. The first estimate of growth in this period will be published in late April, and could well be the most significant piece of data to come out during the general election campaign.
It is, though, the longer-term implications of the investment figures that are so disturbing. As the British Chambers of Commerce noted, businesses have been slashing investment and running down their stocks in order to survive a hostile climate of weak demand and shortages of finance. Manufacturing investment dropped by 35% between the fourth quarter of 2008 and the fourth quarter of 2009, suggesting that UK industry will be in no position to take advantage of rising global demand. It will be the familiar, depressing story of capacity constraints quickly biting, thwarting any attempts to shift the economy away from its over-reliance on financial services and debt-driven consumption.
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