British firms should start spending now: economist

British firms should start spending cash, either through overseas investments, or by returning funds to shareholders, to help revive the economy, said a leading research group.

''If UK companies want to increase their capacity and capitalise on the opportunities that come from an improving world economy, they will need to extend spending to plant and machinery, buildings and overseas market development,'' said Peter Spencer, chief economic adviser, Ernst & Young Item club. ''If you're an overseas-facing company with good investment opportunities, you should be looking to invest spare cash properly.''

Spencer estimates that spare cash flows of UK companies add up to nearly seven per cent of the GDP. The Item Club, in its spring forecast, was hopeful of a major revival in business spending, with a 12 per cent growth in investments this year and a 14 per cent rise next year. ''The purse strings are starting to loosen, with some spending on vehicles and other easy asset purchases beginning to take place,'' he added.

While the club expects the UK economy to grow by 1.8 per cent this year, Spencer warns against a premature rise in interest rates. ''A rate rise would be perverse at this stage, merely adding to the already intense pressure on UK consumers, as well as increasing the retail prices index and risking a rise in wage settlements,'' said Spencer. ''Companies hold the key to UK growth, and a premature rate rise could easily break the key in the lock.''

According to him, the Bank of England's monetary policy committee should maintain the record low rates of 0.5 per cent till November. ''Unlike the European Central Bank, the Bank of England hasn't yet seen any core strength in the UK economy,'' remarks Spencer. ''Manufacturing seems to be performing well, but is too small to get us very far. Our forecast assumes that the committee will keep interest rates on hold until November this year – when a revival should be evident.''

While the UK economy is expected to expand by 2.3 per cent in 2012 and 2.7 per cent in 2013, its unemployment rate is expected to climb to 8.3 per cent by early 2012.

Inflation in the UK fell by 0.4 per cent in March to four per cent, which is still double the Bank of England's target. It was the first time in eight months that the consumer price index shed points.