European investment dive raises fears for future growth

Investment in the eurozone has plummeted in recent weeks, creating a drag on the continent’s economy that economists warn is likely to last even after companies and workers emerge from coronavirus lockdowns. Across the region, capital expenditure has contracted sharply, according to data for countries that have published detailed gross domestic product data, while borrowing to invest has dropped across the eurozone, reflecting businesses’ rising cash needs and plummeting output.

“Investment is crucial, it indicates what future growth is likely to be,” said Yael Selfin, chief UK economist at KPMG. “If you are not investing you are not going to grow faster later.” The proportion of eurozone banks reporting demand from businesses to take out loans for long-term investment fell to a balance of minus 15 per cent in the first quarter, from 0 in the previous three months, statistics from the European Central Bank show. In contrast, demand for working capital surged to a net balance of 26 per cent, from 0 in the previous quarter, as businesses sought cash to cover ongoing payment such as rents and wages.


Andrew Kenningham, chief Europe economist at Capital Economics, forecast eurozone business investment would fall 24 per cent year on year over 2020, contributing to an expected 12 per cent contraction in GDP. “Many businesses are cash-strapped and will be reluctant to use scarce liquid resources to fund investment,” he said. “On top of the normal recession challenges, companies will be struggling with deferred tax payments and/or loan repayments over the next year or two.” In the first quarter, France reported its largest contraction in gross fixed capital formation, a measure of private and public investment, on record; Spain’s contraction was also near-record levels, according to preliminary data from their national statistics offices.

Comparable data for Germany, Italy and the UK is set to be published in the coming days and are widely expected to show a similar trend. Claus Vistesen, eurozone economist at Pantheon Macroeconomics, said the fall in investment, along with a drop in consumer spending, were “likely to be the main drivers” of Germany’s expected economic contraction. Economists polled by Reuters expect Germany to record a 2.2 per cent quarter-on-quarter fall in GDP when the data is published this week.

But not all economies across the region are equally affected; those that bore the heaviest brunt of the financial crisis and have struggled to bounce back in recent years are now facing the sharpest investment contraction, economists said.

Even before the pandemic hit, investment in peripheral European countries was still about 20 per cent below pre-crisis levels. “Higher policy uncertainty in southern economies could mean firms will delay investment plans to a larger extent than firms in other countries,” said Moritz Degler, economist at Oxford Economics. “The absence of a solid investment recovery in the southern economies will worsen economic divergence in the eurozone.” The drop in business investment is expected to persist; Oxford Economics forecasts a double-digit contraction in nearly all of Europe’s largest economies in the second quarter of this year.

n France and Italy, official national surveys showed that businesses’ investment plans fell to record lows. The decline in Europe’s overall investment levels was partly driven by a fall in foreign investment. The number of greenfield foreign investment projects in western Europe halved in the first three months of the year compared with the same period last year, according to a database run by fDI Markets, an FT-owned tracker of cross-border investment. The figures exclude portfolio investment and mergers and acquisitions. Only 848 projects were recorded in the region, the lowest in a decade, fDI Markets said; it estimated that this equated to the loss of 200,000 jobs that would otherwise have been created. Globally, foreign direct investment is forecast to drop up to 40 per cent in 2020 compared with the previous year, according to the UN’s trade body Unctad, with energy, airlines and the car industry being the hardest hit. In Europe, manufacturers producing investment goods — those used as inputs for the production of other goods and services, such as machinery, lorries and equipment — experienced the biggest hit to activity, according to official data. In Germany, the production of investment goods fell 17 per cent in March compared with the previous month, more than double the fall in the output of consumer goods. France and Spain registered even wider differences.

The fall in business investment comes despite companies’ need to spend money on adapting to the new social distancing measures as their economies begin to reopen. Companies are also facing pressure to diversify production and reshape their supply chains — in particular, bringing products and services that were previously sourced abroad back onshore — a trend that should also drive an uptick in investment.

More than half of global finance leaders are planning to develop additional sourcing options, a share that rises to 54 per cent for Germany, according to a recent survey by PwC. Nearly half reported plans to accelerate the use of automation. “In the aftermath of the lockdown, as the economy gradually reopens, some businesses will have to invest to adjust their business model to the new and temporary social distancing economy,” said Bert Colijn, senior economist at ING. However, “this effect is likely to get dwarfed by the continued uncertainty that a scenario in which the virus and partial lockdowns return later in the year or early next year”, he warned. “Even with a [coronavirus] vaccine . . . it is likely that businesses will remain cautious as the crisis will have had a significant impact on their liquidity.”