Britain’s investment crisis

 

There are a number of complementary explanations for why economic recovery in Europe since the crash of 2007/8 has been so much weaker than was expected by governments - such as the necessary and inevitable shrinkage of the banking sector and the crisis in the eurozone.

But one of the most important causes, highlighted in a new report by McKinsey, is that there has been what it calls "an unprecedented weakness in private investment".

McKinsey says: "The fall in private investment between 2007 and 2011 was larger than any previous decline in absolute terms and four times the decrease in real GDP over the same period."

Which isn't very cheery.

We have felt the impoverishing impact of this investment slump here in Britain.

A few months after the last general election and the coalition government's first budget, the newly created Office for Budget Responsibility was forecasting that business investment would grow by 8.6% in 2011 and 8.4% in 2012, underpinning economic growth in those years of 2.1% and 2.6%.

In fact, business investment grew by just 2.9% last year, a third of the forecast rate, and is expected to increase by 3.8% in 2012 - which is one reason why the economy expanded by less than 1% in 2011 and is set to shrink this year.

Some of this weakness in investment in the UK can perhaps be seen as bad luck: it is difficult to blame the David Cameron and his colleagues for the mess in the eurozone, which has so shaken business confidence.

Also, a good deal of the investment squeeze is the poisonous legacy of the recklessness of banks in the boom years, which lent unprecedented and ludicrous sums to over-indebted property developers. The bust in property development was probably impossible to temper.

But that is not to absolve the government of all responsibility for the weakness of investment.

McKinsey points out that it is very unusual for a surge in investment to be the initial driver of economic recovery. It is typically a revival in consumption that provides the initial fuel.

But on this occasion, consumers have been unable to provide that fuel - partly because they are more indebted than they've ever been, and many of them want to save rather than spend, and partly because of the squeeze on their spending power from an increase in food and energy prices at a time of stagnation in earnings.

For the avoidance of doubt, ministers in this government have consistently and repeatedly told me that the British economy had become far too dependent in the boom years on consumer spending - and they recognised that a rebalancing towards investment was essential.

So although another of the Office for Budget Responsibility's forecasting booboos was to anticipate faster growth in consumer spending than has materialised, ministers were well aware that they could not count on the behaviour of consumers to lead the UK back to prosperity.

What the McKinsey report implies is that the government has done far too little to encourage an increase in business investment. And government officials, in their less guarded moments, pull their hair out and agree.

The problem is that the sort of thing that would lead to an economically meaningful increase in investment by big companies - which, as you will recall, are sitting on almost record amounts of cash - are in the box labelled "politically horrendous".

Here is a verbatim list of what one influential official believes the government needs to do:

1. Place fewer restrictions on immigration, especially of those with skills (and McKinsey adds that "there is evidence that immigration limits inhibit the expansion of the university sector");

2. Get going on the building of new airport runways in the south;

3. Abolish planning restrictions far more than has been done and be much less worried about building on the Green Belt.

This is how McKinsey puts it. "Even in the short term - and in today's weak demand conditions - government could unlock private investment by removing regulatory barriers that currently stand in the way."

But that is much easier to do in countries like Italy and Spain, whose markets are subject to many more restrictive practices than is true of British markets, than in the UK.

Over here, removal of the residual and significant regulatory barriers - such as who can come to Britain or where and how it is possible to build - is seen by influential groups of voters as a full frontal attack on the British way of life.

Which implies not that the government is powerless to spur investment and growth, just that it requires them to embrace the politics of confrontation in a way that has not been seen in this country since Mrs Thatcher.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 241.

    #241 David Lilley

    Senior Executives from the Old Lady of Threadneedle Street and outside independent banking experts, seemed to agree with the idea of an Inquiry, when interviewed by Radio 4's programme, "Pension off the Old Lady!"

    A 1930s US Pecora Commission style UK Royal Commission of Inquiry on causes of the financial crisis, credit crunch and recession it is, then!

    One hitch - Downing St!

  • rate this
    0

    Comment number 240.

    We reject 1, 2 and 3 above. We answer the Queen by having a Royal Inquiry into the cause of the "Debt Crisis". We call it the "Debt Crisis" which led to a financial crisis and the credit crunch. We recognise that 10 years of leveraging will be met by 10 years of deleveraging. But we also recognise that we can break the cycle by supporting immediate weath generation.

  • rate this
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    Comment number 239.

    I may live in a world of my own but I share with others that I am not spending.

    If we are not spending because we cannot afford to or are deleveraging then demand is low and investment is low. Even investment of 2.9% is rather replacement of broken hardware rather than meeting non-existent growth.

  • rate this
    0

    Comment number 238.

    Retail banks have put consumer borrowers under pressure, reducing disposable incomes by increasing mortgages lending rates; average differentials between BoE base rates & mortgages increased from 0.3% in 2007 to nearly 4% now.

    Banks are repairing balance sheets, particularly on commercial real estate clients' lending.

    An equity participation approach to financing small & medium co's is needed.

  • rate this
    0

    Comment number 237.

    235. Large % of people own their home outright (31%). Just 33% of households have a mortgage. So whilst the affect may be to lower house prices, or at least hold prices, the majority of the population will not face issues in terms of mortgage to equity. Building mor houses wil also help to reduce costs of renting; surely a good thing.

 

Comments 5 of 241

 

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