Investment in businesses decreases due to concerns about low productivity levels
The UK economy is facing a series of challenges that are impacting business investment, productivity levels, and public finances. According to a group of economists, weak consumer and business confidence, low productivity growth, and rising business costs are dragging down growth in the near term.
Independent economist Vicky Pryce, Anna Leach from the Institute of Directors, and Kallum Pickering of Peel Hunt all agree on this point. They highlight the stagnant productivity levels, as measured by GDP per hour worked, which have remained unchanged since the 2008 financial crisis. The Office for National Statistics (ONS) reported a 0.2% drop in productivity over the year in the first quarter of 2025, according to an ONS flash estimate.
The ONS also reported a 4% decrease in business investment in the second quarter of the year, and a 1.1% decrease in gross fixed capital formation, which includes investment in transport and machinery. These findings are a cause for concern, especially considering the lacklustre growth data for the UK's private sector.
Economists are also worried about the state of public finances in the UK. Ruth Gregory stated that the government's policies to raise public investment, stimulate homebuilding, and boost business investment have the potential to boost economic growth. However, she expressed concern about the fiscal pressures that these policies may create.
The persistent risk of missed fiscal targets may require steep tax rises in the Autumn Budget 2025, according to Raj Badiani, economics director at S&P Global Market Intelligence. This could further dampen business confidence and investment.
Many firms are deferring investment and hiring due to concerns about tax hikes and tariffs, according to Leach, which risks deepening the cycle of low growth. The possibility of political instability post-2025 elections, evolving trade relationships, anticipated interest rate policies by the Bank of England, and regulatory shifts create volatility that discourages investment and affects economic confidence.
The current concerns impacting UK business investment, productivity levels, and public finances include rising business costs, subdued investment, weak productivity growth, and fiscal pressures amid domestic and international uncertainties. Most economists believe that low productivity growth is a key issue that is difficult to fully address, particularly given fears of more taxes for industry.
In summary, UK business investment and productivity are constrained by rising costs, global trade and regulatory uncertainties, and a widening public-private productivity gap. These challenges, coupled with fiscal constraints, point to a fragile economic outlook with subdued growth prospects in the near term. The government's policies and decisions will play a crucial role in addressing these issues and steering the UK economy towards a more stable and prosperous future.
The economists, including Vicky Pryce, Anna Leach, and Kallum Pickering, have noticed that stagnant productivity levels, as measured by GDP per hour worked, have remained since the 2008 financial crisis, affecting the UK economy. The Office for National Statistics (ONS) reported a drop in productivity and a decrease in business investment in the year's first and second quarters, respectively.
Economists are also concerned about the state of public finances in the UK, with fiscal pressures possibly requiring steep tax rises in the Autumn Budget 2025. This could further discourage business confidence and investment, as many firms are already deferring investment and hiring due to concerns about taxes.
Investing, businesses, and the economy are impacted by political instability, evolving trade relationships, anticipated interest rate policies, and regulatory shifts, creating volatility that discourages investment and affects economic confidence. The lacklustre growth data for the UK's private sector and the persistent risk of missed fiscal targets make a fragile economic outlook with subdued growth prospects in the near term.
The government's policies towards public investment, homebuilding, and business investment have potential to boost growth, but economists fear the fiscal pressures these policies may create. Addressing the key issue of low productivity growth, particularly in the face of fears of more taxes for industry, will be crucial for steering the UK economy towards a more stable and prosperous future.
