Weak Business Investment Threatens Global Growth

Strategic Insights -

Global growth is facing a significant threat due to weak business investment in advanced economies, according to a warning from the Organisation for Economic Co-operation and Development (OECD). Corporate spending, which was severely impacted by the 2008 financial crisis and the subsequent pandemic, has failed to recover in most countries. As a result, net investment across OECD nations has dropped from 2.5% of GDP before the crisis to 1.6% for the median country. This decline is particularly concerning as business investment is essential for sustaining economic growth.

Key Takeaways:

  • Only two advanced economies, Israel and Portugal, have surpassed their pre-financial crisis net investment trends as of last year.
  • Six countries, including Canada, Italy, and Australia, have recovered to their pre-Covid-19 investment trends.
  • Average investment among OECD countries is 20% below levels that would have prevailed if pre-financial crisis trends had continued.
  • Investment remains 6.7% below the pre-Covid trend and 1.4 percentage points lower due to persistent policy uncertainty.
  • Strong growth in digital and knowledge-based investment has failed to offset declining investment in physical assets, leading to ongoing declines in net business investment.
  • Businesses are failing to invest in profitable marginal projects due to elevated uncertainty and a focus on shareholder payouts, such as in the UK's water sector.
  • English water companies have paid out £83 billion in dividends since privatization, while infrastructure spending over the same period totals £230 billion.
  • Oil major BP is under pressure from investors to reduce spending to protect shareholder payouts.

Statistics:

  • Net investment across OECD nations has dropped from 2.5% of GDP before the 2008 crisis to 1.6% of GDP for the median country.
  • The pandemic delivered a further blow to corporate spending, with investment now 20% below pre-financial crisis trends, and 6.7% below pre-Covid trends.
  • Ten years after the financial crisis, business investment in OECD countries remains 1.4 percentage points lower due to persistent policy uncertainty.
  • English water companies have paid out £83 billion in dividends since privatization.
  • Total infrastructure spending by English water companies during the same period totals £230 billion.
  • Oil major BP is under pressure from investors to reduce spending to protect shareholder payouts.

Sources:

  • OECD working paper (no specific date mentioned in the source)
  • Financial Times (Article authors: SAM FLEMING, no publication date mentioned)
  • Bank of Portugal (Alvaro Pereira, outgoing chief economist at the OECD)