UK ranks second-lowest in G7 for business investment, IPPR warns

British companies are investing less in their domestic economy than almost any of their G7 counterparts, reinforcing long-standing concerns about productivity and growth as rising energy costs add fresh pressure on industry.

Analysis from Institute for Public Policy Research (IPPR) shows that private sector investment in the UK amounted to just 11.1 per cent of GDP in 2023, the second-lowest level in the G7, ahead only of Canada at 10.8 per cent.

By comparison, Japan leads the group with investment equivalent to 18.2 per cent of GDP, followed by France at 12.6 per cent and Germany at 11.9 per cent, highlighting the scale of the UK’s relative underperformance.

The findings underline a persistent structural issue. The UK has consistently ranked near the bottom of the G7 for business investment since the global financial crisis, and has remained below the group average every year since 2001.

According to the IPPR, this chronic underinvestment has constrained productivity growth for years, limiting the ability of businesses to expand capacity, adopt new technologies and improve efficiency.

One of the clearest indicators of this gap is capital intensity, the amount of equipment and infrastructure available to workers.

The report estimates that UK workers have 38 per cent fewer tools at their disposal than their counterparts in other advanced economies, rising to 47 per cent in manufacturing sectors. This shortfall, often referred to as the “capital gap”, is seen as a major drag on productivity and competitiveness.

High energy prices are identified as a central factor holding back investment. UK businesses face some of the highest electricity costs in Europe, a situation that has worsened following the recent surge in global gas prices linked to geopolitical tensions in the Middle East.

Pranesh Narayanan, a senior research fellow at the IPPR, said companies are caught in a “double squeeze”.

“Businesses are investing too little while also facing some of the highest electricity costs in Europe, and the two are closely linked,” he said.

Rising energy costs not only increase operating expenses but also reduce the incentive to invest in new facilities or equipment, particularly in energy-intensive industries.

The report calls for adjustments to the government’s planned British Industrial Competitiveness Scheme (BICS), which aims to reduce electricity costs for around 7,000 factories by up to 25 per cent when it launches in 2027.

The IPPR argues that the scheme should be more targeted, focusing on sectors where lower energy costs are most likely to unlock new investment and drive long-term growth.

“With limited fiscal room, support should be directed where it can generate new factories, new equipment and new jobs,” Narayanan said.

The UK’s low investment rate has significant implications for economic performance. Without sufficient capital investment, businesses struggle to improve productivity, which in turn limits wage growth and overall economic expansion.

The issue is particularly acute at a time when the economy is facing additional headwinds from inflation, higher borrowing costs and global uncertainty.

The latest findings reinforce the urgency of addressing the UK’s investment gap, particularly as global competition intensifies and technological change accelerates.

While policy initiatives aimed at reducing energy costs and supporting industry could help, the scale of the challenge suggests that a broader, long-term strategy will be required.

For businesses, the decision to invest will depend on confidence in the economic environment and the cost of operating in the UK. For policymakers, the task is to create conditions that make such investment both viable and attractive.

Without a sustained improvement, the UK risks remaining stuck in a cycle of low investment, weak productivity and subdued growth, a challenge that has persisted for more than a decade.

Jamie Young

Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.

When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.

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