27/11/2012 10:24 GMT

British Businesses Increase Spending, But Long-Term Future Looks 'Unclear'

Businesses are starting to invest again, according to figures from the Office for National Statistics, spending £1.1 billion more than in the last quarter.

Total manufacturing investment rose slightly to £3.2bn compared with the previous quarter, while non-manufacturing investment rose by £1.1bn to £28.1bn.

However, the ONS warned it was unclear whether this relative boost to business profitability will be sustained and whether the growth rate of investment will then increase.

It predicted the eurozone debt crisis will continue to weigh on economic sentiment and therefore hang heavy over business investment decisions, in the near term.

Chris Cummings, chief executive at lobbying group TheCityUK said the increase in business investment suggested some companies were starting to release some of their stockpiles of cash, pointing to an improved confidence in business.

“A recovery in business investment is always welcome as it contributes directly to growth, although the quarter three business investment partly reflects a pick up from the weaker previous quarter," he told Huff Post UK.

"Overall, however, a rise in total business investment for 2012 of around 3.5% is likely if this higher figure is sustained in the final quarter. This would build on a 3% rise in 2011.

"However, to encourage further investment, regulatory authorities need to take a closer look at bank regulation, which is impacting on lending and investment."

TheCityUK has recently published a report by Ares & Co, which found that UK and European banking regulation still threatens to constrain economic growth by limiting banks' ability to lend to SMEs.

The International Monetary Fund has recently documented the massive deleveraging of European banks since 2008, and calculated that their balance sheets could shrink a further 10% by the end of 2013. This could reduce credit supply in Europe by as much as 4%.

Interestingly, the report showed Bank lending to SMEs in France has, unlike the UK, been growing since 2010. It is also believed to be the case in Germany, and analysis and discussion with European interviewees suggest that several factors are at play.

In both France and Germany, a variety of government support structures have been in place for many years that effectively underpin SME lending; these mechanisms affect both pricing and supply of sme lending.

France and Germany also have a large number of small local banks that are involved in SME lending, contributing to improved access to finance for SMEs.

"As per the recommendations in our recent report looking at SME Financing, we believe that regulatory authorities should take a moderated approach to imposition of bank capital and liquidity requirements in line with the recommended BIS schedule," said Cummings.

"This could release more funds for lending to companies, particularly SMEs, which would help to support further investment.”