Spending on new equipment has stalled

UK business investment has dropped to its lowest level for five years, official statistics have revealed.

Manufacturing was the worst hit, with spending on new plant and equipment dropping to levels not seen since the mid 1980s.

Non-manufacturing investment was flat - but there were few signs that hard-pressed businesses were about to embark on a spending spree.

The gloomy figures will fuel speculation about a further cut in interest rates, after the Bank of England's decision to slash rates to a 48-year low of 3.75% earlier this month.

Cuts likely?

John Butler, economist at HSBC, said: "There appears to be little sign of turnaround in business investment.

This statistic, more than any other, belies any talk of a recovery in the (manufacturing) sector Simon Rubinsohn, Gerrard

"These numbers make a further interest rate cut more likely - but not probable."

The figures, from the Office for National Statistics, show business investment dropped to its lowest level in five years in the last three months of 2002.

At �25.6bn, investment was 1.1% down on the previous quarter and 9.2% down on the same period a year earlier.

IT boost

The decline hit both the manufacturing and service sectors which were down 7.9% and 0.4% for the quarter.

But in one bright spot there was a 10.2% increase in investment from the distribution services sector.

There was also good news for the struggling IT sector, with the figures pointing to a pick up in expenditure on both computer hardware and software.

Private sector companies spent �1.1bn on computer software and �1.5bn on hardware during the fourth quarter.

'No recovery'

However, economists are now predicting Chancellor Gordon Brown will use the greater economic uncertainty stemming from developments in Iraq as an excuse to lower his 3% growth forecast for this year.

Manufacturing remains a particular problem, with investment falling 17.7% over the past year to �3.3bn.

Economists said investment in the sector, which makes up 20% of the British economy, had sunk to its lowest level since 1984.

Simon Rubinsohn, chief economist at stockbroker Gerrard, said: "This statistic, more than any other, belies any talk of a recovery in the sector."

Political reaction

Opposition politicians seized on the figures as a sign that Labour's economic policy is starting to unravel.

Tim Yeo, shadow secretary of state for trade and industry, said: "You cannot milk business of �47bn of new taxes and pile on a �20bn cost of new regulations without inflicting severe damage."

Liberal Democrat treasury spokesman Matthew Taylor said: "Unless the chancellor frees business from red-tape and tax complications and acts to address the competitiveness of British exports, the future for business is murky."

'Real fears'

Bosses' group the CBI said the latest figures were "deeply worrying".

Chief economic adviser Ian McCafferty said: "This raises real fears that we may not be in a good position to take advantage of the global upturn when it comes.

"The manufacturing sector has been particularly badly hit, with investment now as low as it was in the mid-1980s.

"We trust that the Chancellor will not make a bad situation worse by further raising the business tax burden in next month's Budget."