Business investment fell heavily in the final three months of last year as the financial crisis restricted banks from lending to companies.Business investment by manufacturing and non- manufacturing companies in the three months to December was estimated to have fallen by 3.9 per cent from the previous quarter and was 7.7 per cent down on the same period in 2007, the Office for National Statistics said. “Businesses are increasingly and substantially scaling back their investment in the face of sharply weakening demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession,” said Howard Archer, economist at IHS Global Insight. “On top of this, the marked downturns in the commercial property sector and the housing market are substantially depressing construction investment.“While business investment data are frequently subject to revision, the figures underscore a key feature of the current recession – it is investment-led, with the drop in business spending having knock-on effects that are now filtering through the economy and pushing up the number of unemployed.
How significant is the contribution of investment to aggregate demand? Explain how the fall in investment is affecting employment.
2 comments:
This is no suprise really. Due to the falling level of sales and the falling demand for goods from the consumer, there is no real incentive for the manufacturers to invest their money. However, perhaps now could be the right time to invest thier money? Although they will have a lesser profit margin due to less demand for the goods and services, investment now could put some business in a good position once we come out of the recession. A business may be able to get more for their investment at this current period due to a fall in demand. I think that this is a good time for businesses to invest their money and it may help to boost the economy at the same time. The business will have to spend money on construction which will lead to the multiplier effect. Also, investment now could mean that businesses are able to achieve economies of scale so that they are able to produce their goods cheaper now which means that they can drop their prices which is good for the consumer in the current climate. Although they may not make as much per unit sold, if they sell more then that will mean that the business may be able to make more of a profit so the investment is seen as a good option to take.
Good points Ash!
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