Business investment continued to plummet between July and September, official data showed today, heightening concern about the sustainability of Britain's economic recovery.

The total of money invested by businesses in their infrastructure dropped by 3 per cent in the third quarter, compared with the previous quarter, but fell by 21.7 per cent on an annual basis.

Howard Archer, the chief UK and European economist for IHS Global Insight, said: "The sharp decline so far in business investment is a major threat to UK productivity; and the longer that capital expenditure declines, the greater will be the potential longer-term repercussions."

There was a glimmer of hope as the pace of decline in investment eased slightly. The 3 per cent drop came after falls of 8.9 per cent and 10.2 per cent in the first and second quarters of the year.

Economists had expected a bigger 6 per cent quarterly drop in the third quarter, and so despite the still substantial fall in investment, analysts believe that today's figures could have a positive impact on the revisions to the overall GDP figures for the third quarter.

Last month, preliminary estimates from the Office for National Statistics (ONS) showed that GDP — the main measure of economic output — fell by 0.4 per cent between July and September. This is expected to be revised to show a drop of 0.3 per cent when the second take on the data is released tomorrow.

The new figures came as Mervyn King, the Governor of the Bank of England, warned that the Government needed to shore up the public finances to boost confidence in the economy. Speaking to the Commons Treasury Select Committee this morning, Mr King said: "Banks are actively trying to reduce their leverage. There is a long way to go in that process, and whilst it is continuing, the availability of credit to households and companies will be impaired. That, combined with uncertainty about future incomes and profits, will make households and companies reluctant to spend.

"The need for a credible plan to consolidate the public finances is clear to everyone, and will mean a lower share of national income is devoted to consumption — either public or private — in the future."

The drop in consumer spending was reflected in investment by hotels and restaurants, which have been hit by the slowdown in demand. Their investment was down by 18.2 per cent in the third quarter, and by 35.1 per cent on the year.

Factories cut their investment by 9.5 per cent in the third quarter, compared with the previous quarter, taking the annual contraction to 28.9 per cent. Non-manufacturing investment has fallen by a more modest 20.9 per cent over the year.

However, the financial sector has stepped up investment after a pick-up in profits. Investment in this sector rose by 27.1 per cent in the third quarter, compared with the second.

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