UK INVESTMENT DOWN
Investment by British companies slowed in the final quarter of 2014, official data showed Thursday, as the fall in oil prices drove the North Sea extraction industry to cut down spending on infrastructure.
Business investment shrank 1.4% compared with the third quarter, according to the Office for National Statistics, the second quarterly fall in a row and the biggest slump in more than five years. Year-over-year, growth was 2.1%, the slowest since early 2010.
The decrease was driven by the oil extraction industry in the North Sea reducing its investments in equipment such as oil platforms, the ONS said, as the ultralow price of commodities in the international markets is making their business less profitable.
Nevertheless, the second estimate of gross domestic product, released Thursday, confirmed the U.K. economy expanded a healthy 0.5% on a quarterly basis or at an annualized rate of 2.2% in the three months to December. In 2014 as a whole, British GDP grew 2.6%, matching the average forecast of economists polled by The Wall Street Journal, which expected data to be unrevised.
Even though these figures highlight the recovery cooled compared with earlier during the year, the U.K. still managed to outperform all other countries in the Group of Seven leading nations in 2014, with economists expecting Britain to have a bumper start to 2015.
Trade also managed to make a positive contribution to GDP in the final quarter, although analysts forecast exports to the eurozone—the U.K.'s largest market overseas—are likely to remain weak through the year, as the countries that share the common currency continue to battle their economic woes.
Economists underscore, however, that the growth of the British economy has become unbalanced, as it is too reliant on its own consumers to fuel growth. Household spending grew 0.5% on the quarter and 2.2% on the year, official figures showed. Lower oil prices and a pickup in wages—which have put an end to a five-year-long squeeze in living standards—are a boon for British households and allowed them to ramp up spending during the period.
But a sustained fall in investment by companies could hurt the already sluggish productivity of the U.K. economy and damage its prospects of long-term growth. Furthermore, analysts warn businesses could continue to delay investing ahead of what is set to be a closely fought general election in May.
"Potential political uncertainty poses a significant downside risk to growth in 2015," said Howard Archer, economist at IHS Global Insight. "If there is sustained political uncertainty after the May general election, then the U.K. could well suffer at least a temporary loss of economic traction."
Polls suggest minority parties such as the U.K. Independence Party and the Scottish National Party could win enough seats to lead to a hung Parliament, which would make it more difficult to form a stable government.
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