A snapshot of investor apathy in the EU

Economic growth in the EU has not only diminished in recent years by the string of intense and varied shocks it has endured (COVID-19 and the war in Ukraine), but its composition has also changed, with a greater role now played by public consumption, partly driven by the NGEU funds,1 and by the foreign sector (see first chart). In contrast, private domestic demand is keeping a low profile, with a marked slowdown relative to the pre-pandemic years in both private consumption, despite the strength of the labour market, and particularly in the case of investment, which in 2024 was still showing a volume of activity similar to that of 2019.

By asset type, investment has been particularly weak in machinery, equipment and intangibles (see second chart), with COVID-19 continuing to have a negative and persistent impact in an environment marked by heightened uncertainty and limited prospects for increased capacity among European firms.2 Capital expenditure on construction has performed better, supported in its non-residential segment by the increase in public investment, and in the housing segment in the first few years after the pandemic by the combination of accumulated savings, favourable financing conditions and schemes supporting home renovations – most notably Italy’s Superbonus, where investment in housing has almost doubled compared to 2019.3

By institutional sector, this setback has been led by non-financial corporations, which account for most of the stock of capital in machinery, equipment and intangibles – precisely the types of assets that have shown the worst trend in volume terms, as noted above, and have also seen price declines relative to other products. At the oppositeend of the spectrum, both the general government and households – with their capital concentrated in infrastructure and housing, respectively – have contributed to raising the aggregate rate of investment recording growth in volume terms just below that of GDP but a sharp increase in relative prices, driven by the rise in the cost of construction materials in the wake of the war in Ukraine and the price rally in most European residential markets since the pandemic.4

Given its central role in the sluggishness of capital formation in the EU, we took a deeper dive into the business sector, performing an analysis disaggregated by investment sector. With data in this case up until 2023, and limiting the analysis to industry and market services, we observe that the fall in the real investment rate has been mostly the result of the more significant decrease in manufacturing and in information and communication technology (ICT) services. Together, these sectors explain a decline of 1.7 pps (see fourth chart), which is only partially offset by a higher investment rate in the utilities sector and a greater role of ICT in the economy as a whole (given its more capital-intensive nature).

The European Investment Bank has recently recalled that the main factors that are considered detrimental to investment are, in this order, a lack of adequate labour, energy costs, uncertainty and the regulatory framework, in all cases to a greater extent in Europe than for US companies.5 Many of these aspects have been the subject of deep reflection in the Letta and Draghi reports published last year and have served as the basis for the competitiveness plan presented by the European Commission on 29 January (the so-called Competitiveness Compass).6 The deployment of measures aimed at reducing the fragmentation of the internal market, lowering energy prices and meeting human capital needs ought to support a more positive medium-term outlook for European investment. However, these measures appear insufficient while we await confirmation of the extent of public leverage in order to boost productive spending in the EU and the establishment of a genuine Savings and Investment Union that can channel the bloc’s persistent and abundant private savings towards the funding of strategic sectors (see fifth chart). Moreover, just when financial conditions were also becoming more accommodative, thus providing an extra boost to firms’ plans to expand their capacity, new threats in the form of tariffs have emerged, bringing renewed uncertainty. When faced with such a situation, investment tends to be halted in its tracks and support from economic policies becomes critical to minimise the damage to future growth potential.