What do recent surveys reveal about euro area business investment in 2024?

The latest Investment Survey from the European Commission suggests muted business investment growth for 2024. The biannual Investment Survey carried out by the European Commission asks firms qualitatively about investment plans for the year and typically tracks annual business investment growth reasonably well. The March/April 2024 reading suggests that, by historical standards (crisis periods aside), investment intentions for 2024 are particularly low in manufacturing, with the balance indicators corresponding to levels normally associated with a stagnation in euro area business investment (Chart A).^[1] This sombre outlook was also suggested by S&P’s March 2024 Business Outlook Survey, while the Commission’s late-2023 survey had previously revealed a marked rise in the share of investment allocated to replacement and rationalisation in recent years.^[2],[3] At the same time, the share of business investment dedicated to expanding capacity fell to just 20% in manufacturing in 2023 – a historical low and a decline of around 10 percentage points compared with pre-pandemic averages – with a further slight decline expected for 2024 (Chart B). Shares are similar in services, but no historical comparison is possible, as the services sector survey was only launched in 2021.

The euro area aggregate masks considerable cross-country and cross-sector variation. The Commission’s euro area averages obscure considerable variation across countries, with investment intentions typically more positive ‒ and revised up since late 2023 ‒ in southern euro area economies, as well as in some newer member countries of the euro area. While recent adverse economic shocks had a less negative impact in countries with a larger services sector, newly disbursed Next Generation EU funds may also already be playing a stronger role in investment in southern euro area economies (Chart C, panel a).^[4] Cross-sector variation is also considerable across both manufacturing and services, albeit with manufacturing sectors typically exhibiting downward revisions in investment intentions for 2024 since the late-2023 survey, while the pattern remains more mixed in services (Chart C, panel b).

Investment intentions for 2024 are higher in sectors with stronger output expectations and lower in more energy-intensive sectors. Investment intentions tend to be higher in sectors with stronger output expectations (as reflected in the strength of new orders, higher rates of capacity utilisation and higher space and equipment needs at the individual sectoral level). In this context, services typically face markedly brighter prospects than manufacturing, with the exception of the pharmaceutical sector (Chart D, panel a). In the aftermath of the 2022-23 energy crisis, energy intensity is likely to continue to influence investment decisions for some time. This is also suggested by the European Investment Bank’s latest Investment Report (EIBIS 2023), where energy costs topped the list of European long-term barriers to investment.^[5] Chart D, panel b) shows a negative correlation between sectoral investment intentions and energy intensity – a co-movement that has become notably stronger since the onset of the energy crisis in 2022. While the recent crisis is likely to continue to require additional investment to reduce energy dependence in many sectors, it seems that longer-term viability considerations are increasingly holding back investment in those sectors where energy costs exceed around 10% of total costs.

Chart D

Investment intentions by output expectations and energy intensity

a) By output expectations	b) By energy intensity
(z-scores; balance indicators)	(percentage share of energy in total costs; balance indicators)

In the face of the series of shocks seen since the start of the decade, some business investment is increasingly being directed towards transitioning to a greener, more energy-efficient economy, although further investment will be needed to meet EU targets ahead. EIBIS 2023 reports a notable increase in the share of European firms investing in energy efficiency in recent years and a strong rise in the use of digital technologies across Europe since the pandemic (albeit still with notable deficits with the United States in the shares of firms using AI and Big Data and in patenting activity related to advanced technologies).^[6] Meanwhile, the Commission’s latest stock-take suggests much higher rates of investment will be required – amounting to at least an additional 1.5% of EU GDP to be invested annually compared with the decade from 2011 to 2020 – to meet the EU’s longer-term carbon neutrality targets.^[7] Ongoing needs in these areas provide further scope for increased business investment ahead.

Source: ECB
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