Business investment is a key component of UK economic activity. It accounts for about 10 per cent of GDP but is also one of the most volatile elements. Historic analysis shows that it is twice as likely to fluctuate as imports and exports and household and government consumption.
Anyone doubting this need only consult the latest business investment figures, published last month by the Office for National Statistics. After the recession began, during the second quarter of 2008, business investment contracted for six successive quarters and revived only during the first three months of 2010. Even then, business investment was down by almost 17 per cent on the same quarter in 2009 and by 20 per cent on the corresponding quarter in 2008.
During the recession, falls in business investment came in almost every sector, with companies as diverse as British Airways, BT, Wolseley and the UK arms of Fujitsu and Starbucks among those reining back in an attempt to preserve cash.
Now that business investment is starting to recover again, it is time to ask what can be done to improve and continue the trend? In this session, we will be examining what steps the Government can take to encourage business investment in the UK.
The issue of what drives business investment is complex and there has been comparatively little research on the subject. However, the Bank of England suggests that investment is driven, in the first instance, by companies’ expectations about their future profits, with a growing body of work suggesting that countries that see a pick-up in business investment — as a share of GDP — also enjoy a sharp rise in stock market capitalisation as a share of GDP.
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In terms of what impedes business investment, the National Institute of Economic and Social Research (NIESR) highlights a lack of certainty about future economic conditions, the ability and ease with which companies can raise capital and, lastly, skill shortages. NIESR found that public infrastructure and planning laws were also factors, but not as significant.