In recent years, the economic slowdown coupled with lower business confidence has seen business investment become more subdued. This was caused in part by lower consumer spending resulting in more subdued revenue growth and downward pressure on company profits. This has increased the uncertainty surrounding future performance reducing the confidence needed for businesses to invest and boost the UK's economic recovery.
During this time, as an alternative to using its cash to invest, business has invested its money on reducing debt, increasing cash reserves and streamlining operations to reduce costs. This was with the aim, successful or not, of reducing uncertainty surrounding corporate stability during the downturn. Now that consumer spending has started to return, will we see business investment start to return creating a more balanced recovery?
One key factor in this respect is interest rates. If interest rates were to rise, consumers with mortgages will see their disposable income fall reducing consumer spending. This downward pressure on revenue and the higher cost of debt will mean business will be less encouraged to invest. As such, if we are to encourage business investment, the Bank of England must be careful not to raise interest rates too early. On the other hand, the increasing use of debt to fuel the consumer led recovery is a cause for concern if allowed to fester for too long. As such, if signs of a consumer debt bubble start to appear, it would be prudent for the BoE to consider what action it should take to prevent such a bubble potentially including the raising of interest rates. However, this action should not be taken unless the conditions require it as not to harm Britain's fragile recovery. Thus, it is vital that we see an upturn in business investment before the consumer debt bubble becomes too big requiring a rise in interest rates.
In recent months we have seen the government and the BoE take action to boost such investment while minimizing the impact on the current consumer led recovery. This has included the scaling back and refocusing of the banks funding for lending scheme away from mortgage borrowing and towards business. This is with the aim of bringing down the heat on mortgage lending while boosting lending to business.
Business investment will continue to be a lagging indicator, but with business confidence on the rise, we may see business investment, slowly but surely, start to rise. This will help to create a more balanced and sustainable recovery. Once business investment has increased and the economic recovery more sustainable, the BoE will finally have the room to consider raising interest rates.
Jason Cates
During this time, as an alternative to using its cash to invest, business has invested its money on reducing debt, increasing cash reserves and streamlining operations to reduce costs. This was with the aim, successful or not, of reducing uncertainty surrounding corporate stability during the downturn. Now that consumer spending has started to return, will we see business investment start to return creating a more balanced recovery?
One key factor in this respect is interest rates. If interest rates were to rise, consumers with mortgages will see their disposable income fall reducing consumer spending. This downward pressure on revenue and the higher cost of debt will mean business will be less encouraged to invest. As such, if we are to encourage business investment, the Bank of England must be careful not to raise interest rates too early. On the other hand, the increasing use of debt to fuel the consumer led recovery is a cause for concern if allowed to fester for too long. As such, if signs of a consumer debt bubble start to appear, it would be prudent for the BoE to consider what action it should take to prevent such a bubble potentially including the raising of interest rates. However, this action should not be taken unless the conditions require it as not to harm Britain's fragile recovery. Thus, it is vital that we see an upturn in business investment before the consumer debt bubble becomes too big requiring a rise in interest rates.
In recent months we have seen the government and the BoE take action to boost such investment while minimizing the impact on the current consumer led recovery. This has included the scaling back and refocusing of the banks funding for lending scheme away from mortgage borrowing and towards business. This is with the aim of bringing down the heat on mortgage lending while boosting lending to business.
Business investment will continue to be a lagging indicator, but with business confidence on the rise, we may see business investment, slowly but surely, start to rise. This will help to create a more balanced and sustainable recovery. Once business investment has increased and the economic recovery more sustainable, the BoE will finally have the room to consider raising interest rates.
Jason Cates
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