Concerns over underlying health of UK economy as 0.3% growth confirmed

ONS says Britain avoided a triple-dip recession because businesses replenished stocks – rather than from surging sales

Britain suffered one of the biggest falls in investment among the G8 last year, adding to concerns that UK businesses are losing competitiveness by refusing to spend on new equipment.

According to an analysis by the House of Commons library, Britain invests a lower percentage of GDP than any other of the leading western industrial nations. The figures, obtained by Labour, show that while most G8 countries have increased investment as a proportion of national income since 2010, Britain suffered the biggest fall of any G8 country apart from Italy.

In France and Germany, capital investment has remained largely stable at 19.9% and 17.2% of GDP respectively. In Britain it fell 0.8 percentage points between 2010 and 2012, to 14.3% of GDP. The US, Japan, Canada, Italy and Russia have higher levels of capital investment than the UK.

The ONS said UK consumer spending rose a meagre 0.1% while business investment fell 0.4%

David Cameron hosts the G8 countries in County Fermanagh in July and is expected to stress the need for the world's leading economies to make greater efforts to generate growth.

The Treasury's independent economic forecaster, the Office for Budget Responsibility, has pencilled in a strong rise in business investment next year in response to growing optimism that the UK recovery will be gathering strength in 2014. However, the OBR has been forecasting a bounce in business investment for each year of this parliament only to see its targets missed.

Ed Balls, Labour's shadow chancellor, said: "Britain has a poor historical record on investing for the long term but things have got worse not better over the last three years. Since 2010 we've seen the biggest fall in investment as a share of national income of any G8 country other than Italy."

"Alongside action now to ensure we have a strong and sustained recovery, we need long-term reforms to make our economy stronger, more balanced and better able to attract new investment and create skilled jobs for the future."

In March Labour published a report by former Institute of Directors boss Sir George Cox, who found businesses wanted the government to play a constructive part in fostering long-term investment.

Figures from the Office for National Statistics showed that business investment was a significant drag on growth in the first three months of the year. The ONS confirmed that Britain avoided a triple dip recession with growth of 0.3% in the first quarter, but a breakdown of the figures showed that investment dropped 0.4%, mainly offset by stockpiling by British businesses.

A Treasury official said several surveys highlighted a nascent recovery in business confidence and activity leading to the expected increase in investment next year. "There are positive signs that activity is picking up across the economy."

The chancellor, George Osborne, is keen to move away from Britain's traditional dependence on the City and government spending as the chief drivers of economic activity. In the first two years of the coalition he focused on providing support for manufacturers and increasing the amount of credit available to firms for investment.

However, separate ONS figures showed that a 0.2% increase in activity across the services sector in March relied heavily on a buoyant banking sector and a modest rise in government spending.

David Tinsley, UK economist at BNP Paribas, described the reliance on stockpiling as "unimpressive". Capital Economics analyst Martin Beck said talk of rebalancing the economy looked "forlorn".

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Stock markets lose nerve on fears of end to quantitative easing

Britain's top companies lose £36bn in value as stock markets react to US warnings on QE and drop in Chinese manufacturing

A day after the FTSE 100 came within 90 points of its December 1999 all-time high, the index slumped 143 points yesterday to 6696, wiping £36bn off the value of Britain's top companies.

The 2.1% fall was the index's worst in one day since it lost just over 2.5% a year ago to the day, on fears that Greece could leave the eurozone. But after its recent strong surge this latest fall in the blue-chip index merely wipes out the gains made since last Friday.

Stock markets around the world tumbled from their recent highs as investors took fright at weak Chinese manufacturing data and signs that the US Federal Reserve might end its bond-buying programme sooner than expected.

A trader on the floor of the New York Stock Exchange reacts as markets fall around the world

Markets have been buoyed in recent months by the various measures taken by central banks to stimulate the global economy by flooding it with cash. Measures include printing money, buying up mortgage-backed bonds and keeping interest rates at historic lows. Much of the recent economic data indicated the policy was having the desired effect, while the long-running eurozone crisis seemed to have entered a period of relative calm.

But analysts have been warning that any signs the money taps were about to be turned off or that the global economy was not recovering as expected would be taken badly by the markets.

Thursday's rout began with comments late on Wednesday from the Federal Reserve suggesting that America could end its quantitative easing, or QE, programme in the near future, and accelerated after a Chinese survey showed factory activity had fallen for the first time in seven months in May. The Nikkei 225 dropped more than 7% overnight on Wednesday to 14,483, its biggest one-day fall for two years. However, analysts pointed out that the Japanese index had almost doubled in value since November, so was still well ahead for the year.

European stock markets fell, with Germany's Dax and France's Cac both closing around 2.1% lower, while Italy's FTSE MIB fell 3% and Spain's Ibex was down 1.4%.

On Wall Street the Dow Jones industrial average, which had reached an all-time high this week, fell sharply when trading opened on Thursdaybefore staging a recovery. By lunchtime the US index was down just 15 points following stronger than expected weekly jobless claims and home sales.

Rupert Osborne, futures dealer at City broker IG, said: "The stronger home sales and jobless claims … fit with the idea that the US economy is approaching a point where a reduction in stimulus is appropriate. This neatly illustrates the irony of the position; traders across the world are openly hoping for poor US data since this keeps the Fed involved."

Ben Bernanke, chairman of the Federal Reserve, had hinted on Wednesday about a possible easing of its $85bn-a-month bond-buying programme, in a testimony to Congress. These comments were later compounded by the minutes of the Fed's last policy-making meeting, which showed that some members thought such a move could come as soon as June, much earlier than any analysts had been expecting.

Michael Hewson, senior market analyst at financial spread-betting company CMC Markets UK, said: "There was an expectation after Bernanke's testimony on Capitol Hill that the latest Fed minutes wouldn't add too much to overall market expectations around the prospects for further easing against expectations of possible tapering.

"The release of the latest Fed minutes completely changed that dynamic with a single line, 'a number of participants express a willingness to reduce QE in June'.

"The disappointing Chinese manufacturing data gave markets the extra nudge over the edge that was needed and persuaded investors with money in the game to cash in."

In China the HSBC purchasing managers index fell to 49.6 points in May, from 50.4 the previous month. Any level below 50 produced by the survey of industry indicates a contracting sector. China is a major consumer of commodities, so the signs of a slowdown in the country put metal prices under pressure, with copper down more than 3%. Oil prices also slid lower, Brent crude falling nearly 1% to $102 a barrel.

But gold and silver edged higher as investors searched out safer assets amid the sell-off.

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HSBC faces court threat as deal on money laundering charges stalls

Judge may take action that could leave HSBC facing a criminal prosecution and threat to its ability to do business in the US 

HSBC's controversial $1.9bn (£1.6bn) settlement deal with the US authorities over money laundering charges has stalled after a row between the justice department and the judge overseeing the case.

The deal – known as a deferred prosecution agreement (DPA) – meant HSBC was exempt from prosecution and triggered a storm of criticism. Judge John Gleeson is now believed to be considering rejecting the deal, a move that could leave HSBC facing a criminal prosecution and the threat that its charter to do business in the US could be revoked.

The bank will hold its annual meeting in London on Friday and is expected to be asked for an update on the agreement.

US authorities reached the deal with HSBC last December after uncovering evidence that the bank had illegally conducted transactions on behalf of Mexican drug lords, terrorists and customers in Cuba, Iran, Libya, Sudan and Burma – all countries that were subject to US sanctions.

Gleeson, a former assistant attorney general, made his name prosecuting drug rings and organised crime, most notably securing the conviction of John Gotti, the Gambino crime family boss. The justice department is believed to be challenging the need for Gleeson's approval after failing to get a quick signature while the judge is upholding his opinion that he must sign off on the DPA.

Court officials would not comment on the case. The judge last referred to the case on 15 February, noting solely that he had not yet approved or disapproved of the settlement. Last December Gleeson said there had been "much publicised criticism" of judges rubber-stamping DPAs.

The agreements are an increasingly common settlement which allow a company to pay a fine to stop a criminal prosecution.

John Coffee, Adolf A Berle professor of law at Columbia University, said judges were increasingly unhappy with DPAs.

"There is a serious disconnect between judges and prosecutors about whether prosecutors are doing anything meaningful," he said.

Senator Chuck Grassley lambasted the justice department over the settlement last year and said it was "inexcusable" that they had not brought a criminal prosecution against the bank. "What I have seen from the department is an inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists. I cannot help but agree with an editorial in the New York Times that 'the government has bought into the notion that too big to fail is too big to jail'," he wrote in a letter to attorney general Eric Holder.

At the time of the deal's announcement Stuart Gulliver, HSBC chief executive, said: "We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again."

HSBC has been seeking a deferred prosecution agreement.

 HSBC has undergone a drastic management overhaul since the issues came to light and has strengthened its compliance policies and procedures. It is continuing to implement those changes as the US authorities work on a resolution to the DPA disagreement.

Stuart McWilliam, senior campaigner with lobby group Global Witness, said: "News that the DPA hasn't yet been signed off gives the justice department a clear opportunity to reconsider the penalties HSBC should face for its widespread money laundering failures.

"Given that over 35,000 people were brutally slain in Mexico at the hands of drug traffickers while HSBC laundered at least $880m of their money, it's shocking that the current system of sanctions does not include senior executives being held personally responsible for the actions of their institutions. Is HSBC too big to jail?"

Gleeson would not be the first judge to challenge a DPA in recent months. Last year Jed Rakoff refused to sign off on an agreement between Citigroup and the Securities and Exchange Commission over the sale of "toxic" mortgage bonds. In his opinion the $285m settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest". That dispute is ongoing.

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