UK Economy: reasons to be cheerful

It's not often you read anything good about the UK or the global economy these days. In fact, Monday brought another gloomy factoid with the FSB's Small Business Voice Index showing a significant drop in confidence in the third quarter of this year - a bitter canape ahead of the main (and probably equally repulsive) meal of the ONS's GDP data out in a couple of weeks. And on Tuesday, we had the disappointing inflation stats alongside an angst-ridden speech from Mervyn King.

However, it is not all bad news. Two investment related developments suggest that there is still life in our sickly economy.

The first is that despite all the bad growth, confidence and labour market data, investment in business in the UK has started to pick up rather sharply. Just before the recession business investment in the UK was running at around £35 billion per quarter. By the end of 2009 it had fallen to around £28 billion before gradually rising until the last quarter of 2010 when it fell off a cliff and dropped lower than it had been in the depths of the recession. However, it suddenly shot back up to just under £31 billion in the first half of this year. Much hinges, of course, on the Eurozone situation. If things spiral out of control there it is highly likely we will see a sudden drop again in investment (especially since a good proportion of the gain is investment in manufacturing where many of the products are aimed at the export market). But at least the data suggests that the UK economy isn't quite ready to roll over and die yet.

The second is a more impressionistic sense that something of qualitative as well as quantitative significance may be happening in that world of investment. This is the growing awareness that corporations are beginning to move with increasing intensity into the venture capital. A number of large companies are establishing 'corporate venturing' arms and the amount of money available to invest seems to have grown significantly over the last year. This is important for three reasons.

Firstly, anything which suggests people with money are looking to invest in business is obviously good for the prospects of recovery.

Secondly, non-financial corporations are currently sitting on truly gargantuan cash piles (somewhere around £600 billion): in many ways, their hoarding of this cash is a major cause of the slowdown and its release a major prospective cause of recovery.

And thirdly, and maybe most interestingly, the direction of even a fair proportion of this cash into innovative and productive SMEs could mark a real break with the investment practices of the last decade which focused, as we all know, too heavily on property and financial innovation at the expense of other sectors.

Interestingly, the last wave of corporate venturing was in the 1990s which drove the spread of web-based technologies and personal computing - of course, that ended badly in the dot.com crash (which started thatlong decade of corporate cash hoarding) but at least, unlike the bubble of the noughties, it did lead to real innovation across the economy. It's a trend interesting enough for the RSA to have started some initial research and analysis in the area. If it's as rich a seam as I hope, we should hopefully have something interestiing to say in the New Year.

A small bounce-back in business investment and the tentative signs of a new approach to venture capital - maybe just small straws in the wind but worth keeping an eye on, if only to hold the spirits up.