Weak business investment threatens global growth, warns OECD
Countries will be ‘unable to sustain growth’ unless companies start opening the taps
Sam Fleming in London
The tension between shareholder returns and investment has been most acute in the UK’s troubled water sector © AlamyWeak business investment is threatening global growth, the OECD has warned, with corporate spending in most advanced economies failing to return to historic trends after the financial crisis and pandemic.
Net investment across the OECD nations has dropped from 2.5 per cent of GDP before the 2008 crisis to 1.6 per cent of GDP for the median country, with the pandemic delivering a further blow, according to the organisation’s figures.
If corporate spending on new projects and facilities does not pick up, countries will “not be able to sustain growth”, Álvaro Pereira, outgoing chief economist at the Paris-based organisation told the Financial Times.
Only two advanced economies out of 34 it tracked had surpassed their pre-financial crisis net investment trends as of last year — Israel and Portugal.
Just six countries are above their pre-Covid investment trends, including Canada, Italy and Australia.
Average investment among the group is 20 per cent below levels that would have prevailed if pre-financial-crisis trends had continued, according to an OECD working paper.
It remains 6.7 per cent below the pre-Covid trend.
Last week, the IMF upgraded its forecast for global growth amid signs that US President Donald Trump’s trade war will inflict less damage than initially feared.
However, its forecast of 3 per cent growth this year still marked a slowdown from 2024’s figure of 3.3 per cent and the 3.7 per cent average before the pandemic.
Multiple factors are playing a part in the phenomenon, but “pervasive” policy uncertainty is a key cause as businesses get buffeted by repeated shocks, warned Pereira, who was recently announced as the next governor of the Bank of Portugal.
Trump’s chaotic tariff rollout has added a fresh reason for corporations to hold back from big spending decisions, the OECD said, adding that business investment had fallen across all major industries.
“Uncertainty has been very pervasive since the financial crisis and we have had a lot of big crises,” Pereira said.
“Sooner or later if we don’t have more investment you will not be able to sustain growth — it is absolutely vital.”
A one standard deviation increase in economic policy uncertainty reduces business investment growth by a percentage point after a year, the OECD analysis found.
This is because firms become more reluctant to splash out on long-term projects when they are unclear about the outlook for global demand, regulation or trade policy.
While there has been strong growth in digital and knowledge-based investment, it has failed to offset the impact of higher depreciation and weak investment in physical assets, leading to ongoing declines in net business investment as a share of economies.
If current elevated levels of uncertainty prevail, real investment could be trimmed by 1.4 percentage points by the end of next year, the OECD added.
While the cost of capital fell after the financial crisis, the research found that firms are failing to undertake the “profitable marginal investments” that should be possible as a result, with companies in a number of countries boosting shareholder payouts compared with pre-crisis trends.
The tension between shareholder returns and investment has been most acute in the UK’s troubled water sector.
English water companies have paid out £83bn in dividends since privatisation 34 years ago, more than a third of the £230bn companies spent in the same three decades on infrastructure.
But the conflict has also been apparent in many other industries.
Oil major BP has come under pressure from investors to make deep cuts to spending to protect shareholder payouts.
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