A dramatic fall in business investment

A significant piece of economic data yesterday that business students might consider as they develop their understanding of the business response to an economic slowdown…

The Guardian reports data from the ONS highlighting a dramatic fall-off in business investment between April - June 2009:

“The Office for National Statistics reported a hefty 10% drop in business capital spending in the second quarter of the year, the biggest fall in 24 years and one which left investment 18% down from a year ago – the worst performance since records began in 1967.”

Bleak news indeed, but perhaps not too surprising given the depth of the recession. The thoughtful business student might pick up on several points of relevance to their studies:

- The effect of lower business confidence on investment appraisal: expectations of lower demand or uncertain future revenues are likely to lower the expected returns from investment projects

- Perceived higher risk of investing during a downturn may lead some businesses to increase their required return from investment (a higher discount rate for NPV calculations)

- A effective way of conserving cash in a downturn is to postpone or cancel significant investment projects

- Many business now have plenty of spare capacity - they can respond to any upturn in demand by making use of spare land, labour and capital resources