The UK economy is lagging behind the European average in capital investment in its business resources and public infrastructure as a share of its GDP, despite increasing levels significantly in recent years, our study reveals.
The UK’s capital investment equated to 17.6% of its GDP in 2015, compared to a European average of 19.3%.
This is despite the UK raising levels by 29.5% over the last five years* to USD 503 billion in 2015 (latest figures available).
Higher capital investment levels are an indicator that businesses are positioning themselves to expand capacity, to improve productivity, or to move into new markets by opening new sites. They also reflect governments’ support for growth by improving the transport links, more efficient power generation capacity and other vital infrastructure that businesses rely on.
Our study looked at “gross capital formation” – or capital investment – in 41 major economies around the world, measuring trends over a five-year period, and comparing investment levels to their Gross Domestic Product (GDP).
Gross capital formation measures spending on assets such as IT systems, new equipment and machinery, and investments in infrastructure projects by governments. The study compares it to GDP in order to put it into context against the size of a country’s economy.
The UK’s increases in investment are likely to be due, in part, to its strong recovery from low levels brought about by the recession and credit crunch.
It adds that another factor is the Government’s Annual Investment Allowance (AIA), which allows qualifying expenditure on assets such as plant and machinery, to be offset against business profits. The AIA had been as high as £500,000 up until December 2015, and has since been reduced to £200,000, [plus an 18% allowance on expenditure over £200,000.]
By contrast, European countries on average have seen capital investment decrease by 5.5% over the last five years (latest figures available).
Laurence Sacker, managing partner at our London office, says: “Capital investment is vital in paving the way for economic growth, so the UK needs to maintain momentum.”
“As in many developed economies, British businesses’ and the government’s ability to invest was hit by recession. However, as the global economy recovers, it’s more important than ever to renew focus on driving investment activity to fuel job creation, spur productivity and enhance competitiveness.”
“Incentives such as the Annual Investment Allowance have helped the UK to buck the downward European investment trend. It’s critical that the government continues to pro-actively support business investment, through keeping the AIA at a sufficiently high level, and through other initiatives such as R&D tax breaks.”
The UK also raised capital investment faster than the G7 average of 11.1% over the five-year period. However, the average amount invested by G7 economies is still substantial – at over USD 1 trillion in 2015 (or 20.7% of GDP).
At the top of the table, China has increased capital investment by 73% to USD 5 trillion – equivalent to 45% of its GDP. China’s extremely high levels of investment in recent years have helped underpin its long run of robust growth, which remains comparatively high, at 6.9% in 2015**.
Alongside a wide range of major public infrastructure projects helping improve productivity and competitiveness, businesses in China have been rapidly expanding capacity and investing in innovation to strengthen their position in the global marketplace.
Table 1: Gross Capital Formation – change since 2010
|3||Rep. of Ireland||$61.4||60.4%|
Table 2: Gross Capital Formation – as a percentage of Gross Domestic Product (GDP)
|% of GDP|
|21||Rep. of Ireland||$61.4||21.7%|
*2010-2015 Gross Capital Formation. Source: World Bank & German Statistical Office
**Source: World Bank