Dead Men Left

Monday, December 12, 2005

Shiny happy people: investment

Stumbling and Mumbling's advising the Tories not to bank on a recession. Reasonably good advice, as far as it goes: Labour in 1992 made the mistake of assuming economic woes would shoo them into office, and there's no great reason to think that Black Wednesday Cameron in year x will be necessarily better placed Kinnock was to exploit the issue.

More of a problem, however, with Chris' happy view of the UK's fortunes. In particular,

Companies have lots of cash. In the last 12 months, their retained profits have exceeded capital spending by £21.7bn, or 2.3% of GDP - the highest proportion since 1983 (table I of this pdf). In theory, this could be a sign of realistic pessimism about the future. But history shows otherwise. Such surpluses have been a great predictor of stronger growth, as firms eventually spend the money on jobs and equipment.

It's the "eventually" that sticks. There's clearly any number of other, far more exciting things for firms to spend their money on - shares, properties, fat bonuses, all sorts of goodies. It's also much easier for them to spend their money like this, the handy by-product of financial globalisation - which, incidentally, has helped weaken the link between retained earnings and business investment, at least for the larger companies.

British business investment in general is at its lowest (as a share of GDP) for forty years, but that's not reason enough to think it will recover. Eight years of persistent New Labour poking and prodding haven't solved this one: despite a slight recovery since 2003, British capital investment lags significantly behind other, similar economies (PDF). It's far more likely that Britain will remain much where it is now: as a low investment, low productivity economy dependent on low wages and long hours to compensate.