Magazine article Management Today

Business in Investment Surprise

Magazine article Management Today

Business in Investment Surprise

Article excerpt

Manufacturing and building may lack confidence, but a boom in the services sector has lifted the UK above European rivals in a show of commitment

What has sustained the economy during this long period as exporters have been hit by depressed overseas markets and an overvalued pound? Consumer spending, I hear you say. Perhaps. But the consumer has taken second place to the business sector in terms of the growth in spending. Britain has been quietly enjoying a strong investment boom.

At a time when Gordon Brown has been identifying underinvestment as one of the central problems facing the economy, businesses have been getting on with the job. Business investment has shown an increase in real terms of nearly 20% since the second quarter of 1997 when Labour came to power, and is up by 50% since 1992, the low point of the last recession. This investment is not spread evenly between sectors. Although up 33% on its trough in the early 1990s, manufacturing investment has dropped by 11% in the last two years and construction investment by 18%. By contrast, there has been an explosion in investment by the services sector, up more than 40% in two years. If you want evidence of a two-tier UK economy look no further than the investment picture.

The first thing to say about these figures is they challenge a Treasury-inspired national inferiority complex on investment. Analysis by Barclays Capital shows business investment is running at just over 10% of GDP in the UK. which is similar to the US, and 1%-2% more than France and Germany. The second point is that, in the 1990s at least, Britain appears to have tilted the balance of investment the right way. Traditionally [and this may not be a diagnosis housebuilders would accept), we have overinvested in private housing (an Englishman's favourite investment) and underinvested in productive equipment. But the rise in business investment since the early '90s is more than double the 24% increase for private dwellings.

The third point is really a question: why has investment been so strong? Should not business have been frightened off by the first sound of economic gunfire with last year's worries of a deep world recession?

Manufacturing, which has been most directly exposed to the problems outside Britain, did indeed respond. For much of the services sector the current wave of investment reflects long-term strategic policy, made necessary by a competitive environment that is impossible to switch on and off in response to short-term worries.

It is hard, on the basis of the data, to determine how much of the boom in services sector investment was technologically driven, as in computer capacity and e-commerce, for example, and how much has been more conventional, such as retailers expanding floorspace. …

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