Uncertainty over profits and the state of the economy led to a sharp decline in business investment in the fourth quarter of 2005, according to official figures released today.

The Office for National Statistics reported that total business investment dropped 1.0 per cent in the three months to January and was just 0.3 per cent higher than the same time last year. The provisional figures mean business investment in 2005 was just 1.6 per cent higher than 2004.

Analysts said the figures highlighted how the UK economy was becoming increasingly unbalanced, with an ever-greater dependence on consumer spending to support economic growth.

Howard Archer, chief UK economist at Global Insight, described the figures as "extremely disappointing".

"The level of business investment was pretty unimpressive, given the overall strength of corporate profitability in 2005, low long-term interest rates and a healthy equity market," he said.

John Butler, chief UK economist at HSBC, said uncertainty over the outlook for the economy and therefore future profit levels, combined with worries about pension deficits were constraining investment.

"According to business surveys, profit expectations across both service and manufacturing companies are at their lowest rate since 2003," he said. "Profit and demand uncertainty are a bad environment in which to invest

"Also it seems more than a coincidence that companies have increased their annual contributions to pension schemes by almost £20 billion a year, 2 per cent of GDP, but investment has remained subdued," he added.

The figures lend credence to the growing band of economists who believe the Bank of England’s projections on growth are too optimistic. The Bank believes a modest acceleration in investment and a resurgence in consumer spending will help the economy recover strongly in 2006 with growth moving above trend by the end of the year.

This analysis was reflected in the decision to leave interest rates unchanged at 4.5 per cent for the fifth month running in February. Stephen Nickell was the only member of the Bank’s rate-setting Monetary Policy Committee to vote for a cut in the cost of borrowing.

Malcolm Barr, an economist at JP Morgan, said: "This release is grist to Steve Nickell’s mill that investment spending is not set to deliver the step up that is needed to get GDP growing fast enough to hit the inflation target." Alan Clarke, an economist at BNP Paribas added: "This is the biggest component of investment that feeds into the GDP accounts, so not great news for growth."

Growth figures for the fourth quarter of 2005 are due on Friday morning.

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