This study addresses the concern of low investment in the UK and its impact on productivity growth. Analysing trends from 1980 to 2022, it reveals consistently lower investment-GDP ratios compared to G7 peers, especially in manufacturing and machinery. But, despite a decline in manufacturing's share of the economy, the UK's finance and ICT sectors also exhibit surprisingly low relative investment - indicating a broader challenge across various sectors.
Is UK investment too low?
The question of low investment in the UK has increasingly gained attention in research and policy circles. Low investment is often discussed as an important contributor to the UK’s low productivity growth: capital deepening increases labour productivity, while investment is the way much technological progress is embodied and used in the economy.
This descriptive study looks at the longer-term trends (1980 to 2022) in UK investment relative to comparator economies in the G7. Our focus is on the traditional national accounts definition of ‘investment’, and specifically Gross Fixed Capital Formation (GFCF). This includes investment in fixed assets and capitalised intangibles by both UK and foreign-owned firms but excludes uncapitalized intangibles.
We consider investment in total, both by sector and by type of asset, as a share of GDP. We also look at sectoral investment as a share of the sector’s own GVA, to take into account the shift from manufacturing to other activities which invest more intensively in human capital and uncapitalised intangibles over this period of 40-plus years.
All the G7 countries experienced a decline in their investment-GDP ratio in the early 1990s, but the comparator countries generally experienced a lesser decline and a stronger recovery. The UK investment to GDP ratio has remained lower than the others since the early 1990s recession.
A breakdown by different sectors and assets suggests that investment in manufacturing industry, and in machinery and equipment, are the main contributors to the overall pattern.
One possible explanation is that the share of manufacturing in the economy has declined over time, and manufacturing is intensive in fixed capital. Surprisingly, however, when investment by sector is considered relative to the sector’s GVA – that is, abstracting from structural shifts between sectors over time – investment in the finance and ICT sectors is also low in the UK by comparison with other G7 economies, with a decline not experienced by the other countries in the early 2000s, and a low subsequent level by comparison.
Our conclusion is that yes, UK investment is low by comparison with other large economies. The decline in manufacturing relative to the whole economy, and low investment in manufacturing, can account for a large part of the total. But the UK fares poorly compared to its peers in other sectors too.