UK companies are putting the brakes on investment spending, slowing the economic recovery amid concerns about the eurozone and general election, a business group has warned.
The government’s hoped for trade and investment-led recovery remains elusive, leaving Britain’s fortunes heavily dependent on the consumer, according to the Institute of Chartered Accountants in England and Wales (ICAEW).
The ICAEW lowered its 2015 growth forecasts for the UK economy from 2.5% to 2.4%. That would represent a slowdown compared with the 2.6% growth achieved in 2014 – the fastest rate of annual expansion since 2007 and the strongest among the G7 economies.
The institute sharply downgraded its expectations for growth in business investment this year from 7.2% to 5.2%, partly because oil and gas companies are reducing their spending in response to the slump in the price of crude.
Businesses also appear reluctant to invest while uncertainty continues both about the possibility of Greece leaving the eurozone and the slowdown in China. On Thursday China lowered its growth target to 7%, its slowest expansion for a quarter of a century.
Domestic concerns include the general election in May, which is leaving companies uncertain about the future of the government’s business policy and raises the possibility of the UK leaving the European Union after a referendum promised by David Cameron if the Tories win.
Michael Izza, ICAEW chief executive, said: “The potential slowdown in GDP growth is a clear sign that UK firms are pressing the pause button on their attempts to drive economic growth. Their exposure to international risks, ranging from the eurozone crisis to China’s cooling economy, has subdued their capital spending plans for the year ahead.
“We cannot overstate the effect of the general election either. Businesses remain concerned about the potential makeup of the next government and its policy towards business. Any steer towards a potential exit from the EU is also causing anxiety. All this means consumers are key to the recovery.”
Business investment fell at the fastest rate in almost six years at the end of last year, the Office for National Statistics revealed last week.
A drop of 1.4% was the biggest quarterly fall since the second quarter of 2009, and driven mainly by oil and gas companies reining in North Sea spending in response to lower oil prices.
Consumers on the other hand have received a major boost from the slump in global oil prices, which more than halved from $115 a barrel in June to $45 in January. On Thursday it was trading at about $60 a barrel.
In a further boost for workers, the ICAEW expects wages to rise in real terms by 1.5% this year, after six years of falling inflation-adjusted pay.
It said a combination of wage growth, low inflation, and lower oil and commodity prices should see the average worker £400 better off this year.
Izza said: “Low inflation is ensuring the first annual increase in employee real incomes since the financial crisis, and the average worker will have more money to spend. However, the government must ensure that growth isn’t predicated solely on a rise in household debt, otherwise we could find ourselves back where we were before the financial crisis.”
The government has argued that in order to secure a sustainable future, the UK economy must rebalance away from its heavy reliance on debt-fuelled consumer spending and towards more investment, manufacturing and exports.
However, little progress has been made and the British Chambers of Commerce believes the chancellor’s target set in 2012 to double UK exports to £1tn by 2020 looks out of reach.
This article was written by Angela Monaghan, for theguardian.com on Friday 6th March 2015 00.01 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010