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Economy: Increase in investment boosts hopes of a sustained recovery

11:07 26 February 2014

Business investment rose by 2.4% quarter on quarter in the final three months of 2013.

Business investment rose by 2.4% quarter on quarter in the final three months of 2013.

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Hopes for a stable and sustained recovery were boosted today as official figures showed the economy becoming less reliant on consumer spending after a surge in business investment.

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New data from the Office for National Statistics (ONS) reveals that business investment rose by 2.4% quarter on quarter in the final three months of 2013, while upward revisions to previous estimates mean it has also increased for four quarters in a row for the first time since 2007.

The figures were released alongside the second estimate of gross domestic product (GDP) for the fourth quarter of 2013, revealing that growth remained unchanged on last month’s projection at 0.7%.

The pace of growth overall last year was nudged down to 1.8% from the previous estimate of 1.9% but experts said the breakdown of fourth-quarter GDP gave an encouraging signal that the economy is rebalancing away from being driven purely by consumer spending.

Samuel Tombs, UK economist at consultancy Capital Economics, said: “The second estimate of fourth-quarter GDP provides further reassurance that the economic recovery is becoming better balanced and is therefore sustainable.”

Prime Minister David Cameron also welcomed the figures, saying in a message on Twitter that they provided “more encouraging news our long-term economic plan is working”.

However, a Treasury spokesman added a note of caution, stating that “as the Chancellor said last week the recovery is not yet secure”.

“The Budget next month will do more to support investment and exports, and the biggest risk to the recovery would be abandoning the plan that’s providing economic security for hardworking people,” he added.

The figures from the ONS showed that, while business investment picked up sharply from growth of 2% in the third quarter, household spending rose by a more muted 0.4% between October and December, down from 0.9% growth in the previous three months. Compared with a year earlier, business investment was 8.5% higher.

Chris Williamson, chief economist at Markit, said rising business investment was crucial for the recovery to remain on track.

He said: “Key to the improved performance of the economy is whether companies will unleash their pent-up cash reserves and embark on a long-awaited investment spree.

“Economic uncertainty and credit constraints have discouraged investment and expansion since the financial crisis struck, but the improved outlook at home and abroad means the environment is now more conducive to investment and risk taking.”

The figures also showed exports picking up, rising by 0.4% during the fourth quarter, in a sign that the recovery is beginning to gain traction in the eurozone, Britain’s biggest trading partner.

Imports also fell by 0.9%, which saw the trade deficit ease to £6.6 billion from £8.2 billion in the third quarter.

Experts had widely expected the ONS data to confirm growth of 0.7% in the fourth quarter, which came as a downward revision to manufacturing growth cancelled out an upward revision to construction output.

The ONS said construction activity rose by 0.2% against its initial estimate of a 0.3% fall, while manufacturing grew by 0.7%, down from the 0.9% previously pencilled in. Services growth was confirmed at 0.8%. It meant all three main sectors of the economy grew for the third quarter in a row.

The Bank of England said earlier this month that it expects fourth-quarter GDP eventually to be revised up to 0.9% growth and gave a rosy outlook for 2014 as a whole as it upgraded its forecast to 3.4% from 2.8%.

There was further good news for the economy last week as official figures showed inflation falling below the bank’s 2% target for the first time in more than four years.

Britain is now said to be facing a golden age of strong economic growth and low inflation, dubbed the “Goldilocks scenario” by one economist.

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