Business investment falls sharply

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.

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How significant is the contribution of investment to aggregate demand? Explain how the fall in investment is affecting employment.

Does Royal Mail need to be privatised in order to survive?

The government want to sell a stake of about 30% in Royal Mail to the private sector to help pay for the modernisation of the service. It is argued that the injection of private capital is necessary to fund the modernisation the company needed. Many European postal firms have automated a lot of their services which saved them money and made them more efficient. Union leaders and MPs are worried about the threat to jobs and the impact of private sector involvement on the Royal Mail's "universal service" obligation to deliver mail to every UK home. There are fears that selling off 30% will open the door to full privatisation in the future compromise this obligation. Ministers say they are committed to the universal service but argue that Royal Mail is less competitive than its European counterparts and needs to improve its performance in order to safeguard its long-term survival.

The labour market isn't working

'Unemployment is the big political issue of 2009' according to Larry Elliott in today's Guardian. In a superb analysis of labour markets in the UK and around the world he shows how the position has become much bleaker during the past year and highlights the limits to what policymakers can do. (See link to article on £2500 new job subsidy). However, he believes that active labour market policies are still worth the effort, using the lessons of the 1980s when so many skills were lost, so many people became demotivated and there were lasting personal and social consequences. There is particular concern for the under 24 age group, because 'there is evidence that a spell on the dole when you are young leaves the deepest scars'. Drops in world industrial output don't augur well for a swift recovery and investment flows are threatened by the large amount of government debt associated with rises in injections of public spending that needs to be sold, leading to the classic 'crowding out' effect. (i.e. private investment funds fall as governments compete for a bigger share to fund their increased expenditure). A compulsory read!

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Link to 'Firms to get £2,500 for each jobless new recruit'

Energy shortfall

The BBC News reports on the possibility of major blackouts in the next 10 years due failure to secure sufficient energy supplies to meet expected demand. Highlights the importance of investment, especially in an industry expected to address serious environmental concerns as well as ensuring supply. Link to BBC News video)

Britain still attractive to foreign investors

The Guardian highlights the fact that Britain attracted the most foreign direct investment (FDI) in Europe in 2007 according to the United Nations, but the financial turmoil in the global markets will have a detrimental effect on investment next year. In its annual World Investment Report, the UN Conference on Trade and Development (Unctad) said that the UK was the number one destination for inward investment in Europe in 2007, attracting more than $1tn (£540bn). Globally, the UK was second only to the US. The main reason for the growth appears to be the increase in merger and acquisition activity. (Link to article)

What impact does increased investment have on the economy? Does it matter that this increased investoment comes from overseas?

Investment and growth

The Economist reports that the biggest investment boom in history is under way. Over half of the world's infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat. Such investment will help support economic growth this year as America's economy stalls—and for many years to come.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. The infrastructure boom has global implications. Increased investment means more imports of capital equipment, which will help to slim current-account surpluses in China and elsewhere, and so reduce global imbalances. Rising demand for building materials will keep commodity prices high. Last, but not least, will be the negative impact on the environment. An expected 75% increase in emerging economies' electricity demand over the next decade will worsen air pollution and global warming. (Read full article here)