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Fiddling on the Deck of the Titanic

11/07/2013 16:06 BST | Updated 09/09/2013 10:12 BST

The mood music around the UK economy has changed in recent weeks. On Tuesday 9 July, the IMF raised its forecasts for economic growth in the UK in 2013 from a measly 0.7pc to 0.9pc. This small but significant change comes just months after it branded Britain 'too weak' to withstand the Chancellor's extreme austerity measures, giving the Treasury a satisfying victory over sceptics. Meanwhile the manufacturing and service sectors recorded their strongest level of growth in two years in June, while the construction sector grew for a second consecutive month, albeit from a base still far below pre-2007 levels.

So are we finally turning a corner? Are we out of the woods? The answer to that is only maybe, at best.

As the Economist has recently pointed out the fact that UK economic growth forecasts are being revised upwards masks the fact that private sector investment in the UK has fallen to a dangerously low level. And if we are to continue on the path of economic recovery, businesses must start investing for the future.

Investment drives productivity, drives wage increases, drives consumption, and ultimately therefore has a huge impact on GDP. That's why both the Government and the Opposition, and everyone else besides, is championing investment - in big infrastructure, sure, but also right across the economy.

The problem is that the majority of economic investment is currently being artificially injected in the system by Government. And this pre-2007 model of growth can only go so far in helping us along the road to economic recovery.

On 1 July, public sector net debt pushed just over £1.2 trillion: as The Spectator says, that is a borowing level of £3,000 a second. In the end, even if the Government pulls a clever trick around the way it reports capital vs current debt, public borrowing will have to come down. So we can't rely on taxpayer-funded investment for everything nor forever. The private sector has to play its part.

Meanwhile, as the Economist has said, as a proportion of national income investment has fallen over the past five years to just 13.5% of GDP, against a global average of 24%. That puts us behind Mali, Guatemala and Paraguay. The first three months of this year continued the trend: whilst the economy grew by 0.3% in Q1 2013, the level of investment dropped by 0.4% as businesses stockpiled cash.

Tuesday's increase in the IMF forecasts could play a role in encouraging investment, as private businesses take comfort in our sunnier economic outlook. But low interest rates and better corporate tax breaks have so far failed to tempt investors. Although, with UK companies sitting on an estimated £750billion in cash, we know the money is there. We just need people to be brave enough to spend it.

So what's holding them back? Part of this is mildly irrational timidity and fear, which businesses need to overcome. But part of it is entirely rational concern about risk, and in particular political risk, as the Government appears to wobble, the Conservatives flirt with anti-European populism, and Labour plays to the gallery of the 'squeezed middle'. Businesses are inevitably spooked by the risk of us becoming semi-detached from Europe, by hostility around corporate taxation, by constant queries about regulatory structures, by dither and drift. Politicians cannot blame the bankers for this: it is all their own fault.

So we might be tempted to revel in our anaemic economic recovery. We shouldn't. As the band keeps fiddling on the deck of the Titanic, beneath our feet - and thanks to the political failure seriously to promote investment in the UK economy - the lower decks are filling with water. This is no time to stop bailing.