Reviving investment helping economy to rebalance

Although net trade dragged on GDP growth in the first quarter, a more encouraging development from the point of view of a rebalancing of the economy was the 1.7% quarterly rise in real business investment. We remain optimistic about the investment outlook. Surveys of investment intentions have remained strong and business confidence is high. Admittedly, the prospect of a referendum on the UK’s position in the EU may prompt some firms to delay investment plans. But investment was strong in the run-up to the Scottish independence referendum. Meanwhile, rising real wages and recent falls in borrowing costs have improved the attractiveness of capital expenditure. So too has the recovery in profit margins back to their long-run average. And since firms underinvested during the downturn, they will have to replace ageing equipment before long. As a result, we think that business investment will continue to grow at a faster rate than GDP over the coming years.