chart below suggests a positive relationship between the growth of consumer
demand and gross fixed capital investment. Investment demand was fairly
sluggish during the mid 1990s - in part because consumer demand recovered
only slowly from the previous recession.
There was a clear
acceleration in consumer demand during 1997-98 and business investment
followed suit. Rising demand, capacity shortages and low interest rates all
acted to stimulate increased capital expenditure.
A slowdown in the
British economy during 1998-99 is shown in the chart. The growth in
consumption fell quite steeply from the 1st quarter of 1998 and investment
demand has also grown more slowly. However the UK economy avoided a recession
and this should mean an absence of economy-wide capital scrapping (negative
growth of real capital spending) which has been a feature of previous
slowdowns and recessions.
investment spending is undoubtedly demand-induced by the rate of growth of
consumer demand supporting the accelerator theory, however other factors also