August 27, 2009 / 8:43 AM / 11 years ago

Business investment falls sharply in Q2

LONDON (Reuters) - Business investment in Britain fell by a whopping 10.4 percent in the three months to June, its sharpest decline in 24 years and raising the risk that Q2 GDP figures could be revised down, official data showed on Thursday.

The Canary Wharf financial district is seen during mid-evening in East London March 26, 2009. REUTERS/Toby Melville

Compared with a year ago, investment fell 18.4 percent, the biggest drop since records began in 1967.

Analysts polled by Reuters last week had predicted no change to the preliminary estimate of GDP in the second quarter published last month showing a 0.8 percent decline when updated data come out at 9:30 a.m. on Friday.

But the business investment data, which on their own would reduce GDP by something like 1.1 percent, has got some of them thinking again.

“Unless there is an upward surprise elsewhere in the breakdown that offsets the diabolical business investment component, we could be looking at a downward revision to -1 percent or lower,” said Alan Clarke, economist at BNP Paribas.

Such an outcome would contrast squarely with better than expected data out of countries like Germany and France which posted a surprise return to growth in the second quarter.

The 0.8 percent decline in UK GDP revealed last month was in itself a shock as many analysts and even policymakers had expected only a small fall in output after the 2.4 percent drop in the first quarter.

Colin Ellis, an economist at Daiwa, said a downward revision was “definitely possible” though his best guess would still be no change to the initial estimate because of a positive contribution from net trade and perhaps stocks.

In either case, such dire investment figures are likely to act as a drag on the economy for some time yet.

“Manufacturing investment has been a casualty of the global recession as both cashflow and confidence have been hit hard,” said Lee Hopley, head of economic policy at the Engineering Employers’ Federation.

“Such a rapid and significant pull back in investment in modern machinery and equipment presents risks for a durable recovery, especially as investment intentions can be slow to recover following a downturn.”

Separate figures from the Confederation of British Industry showed retail sales fell slightly more than expected in August, though retailer optimism picked up a bit.

Analysts said the survey was consistent with a small fall in the official measure of retail sales in August.

House prices, however, jumped 1.6 percent this month, according to the Nationwide building society, the fastest rise in 2-1/2 years, in a further sign the property market is picking up.

Editing by Andy Bruce

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