The associated commentary from ONS notes that the main falls have been in "dwellings", and in plant & machinery:
The revised data suggest that GFCF fell sharply following the onset of the economic downturn, as businesses revised priorities in the face of a reduction in domestic and international demand, and as conditions in credit markets tightened. The downturn in the housing market also had a substantial impact on investment in Dwellings, which fell from £15.8bn in Q1 2008 before the economic downturn, to just £10.9bn in Q3 2009. Investment in Plant & Machinery also fell, while investment in Other Buildings & Structures and Intangible Fixed Assets remained relatively static during this period.Basically, businesses just don't seem to be investing much. I'm particularly amused by the drop in "transport": it seems company cars are out of fashion.
But the sharp fall in business investment in 2008 is not quite what it seems. Here is ONS's chart of business investment since 1998:
ONS explain the 2005 spike as being due to the reclassification of British Nuclear Fuels Ltd. But they don't discuss the other evident spike - the one in 2007-8. The bubble-like nature of business investment at that time is painfully evident in this chart. We now know that some of that was the overblown housing market, and much of the rest was the even more overblown financial services industry. The financial services industry is now more than 13% smaller than it was in 2008 before the crash.
But there's another interesting feature of this chart, and that's the long-term trend. I've recharted it from the ONS data and fitted a linear trend line to it:
I can think of several reasons why business investment might be in long-term decline. Falling cost of technology, for example. Availability of abundant cheap labour in developing countries making capital investment in (expensive) advanced technology uneconomic. Relative decline in manufacturing and growth of services. But if anyone has any more ideas, or objects to these, please do say so in the comments.
I wouldn't like to assume that falling business investment is necessarily a problem. Remember that the ONS's business investment chart records the amount of capital invested, but says nothing at all about the return on that capital. If the cost of capital is falling, then business investment could actually be increasing.The only part of "gross fixed capital formation" whose price we know was rising prior to 2008 then suffered a fall was property. The prices of plant and machinery could well be falling through the floor. And if they are, that might go some way towards explaining why ONS's figures for plant and machinery investment show falls since 2008. When prices are falling, companies defer spending decisions in the hope of further price falls. Deflation in plant and machinery prices, coupled with poor demand and an uncertain economic outlook, might act as a fairly serious deterrent to corporate capital investment.
But it is curious. I wonder how it relates to this:
Maybe it's nothing, but.....it would appear that the 10-year gilt yield has also been in decline for the last 15 years. The 10-year gilt yield is used as a benchmark rate for all sorts of lending - and much corporate capital investment is debt-financed. Coincidence, much?
Oh, and just in passing, that gilt yield chart is another nail in the coffin of the idea that central banks control interest rates. The 10-year gilt yield was already in long-term decline when the financial crisis struck, and there's no evidence from that chart that either the base rate cut or QE had all that much effect. Fitting an imaginary trend line by eye, I would say that yields were above trend (i.e. too high) in 2007-8 and again (slightly) in 2010-11, then a bit too low in 2012 and are now about where they should be. In which case we perhaps also have about as much business investment as can reasonably be expected.
I may have read too much into the gilt chart - I admit its relationship with business investment is somewhat tenuous. But the trend on the business investment chart is striking. If business investment is actually at a level consistent with its long-term trend and with the path of long-term interest rates, then further incentives to invest are not likely to be effective. This does not bode well for an economy that still has unemployment at nearly 8%, falling real wages and substantial under-employment. I fear that if we want to deal with these, the necessary investment must come from the public sector, not the private sector.
Pedro Serodio sent me this on twitter:
Seems the UK's investment decline has been going on for 50 years, not 15. Any suggestions as to why this might be? Shire Blogger suggested that maybe too much investment is going into property. Diversion of investment overseas seems possible too, given the UK's status as a large financial centre. Suggestions welcome.
Economic Review, August 2013 - ONS