European firms are becoming increasingly pessimistic about the economic outlook, according to the new EIB Investment Report 2019/2020.
The report also finds that investment in climate change mitigation is lower than that of major economies like the US and China.
Infrastructure investment is stuck at 1.6 per cent of EU GDP, the lowest in 15 years and Europe is failing to reap the benefits of digital transformation.
The report, which reflects the results of the annual EIB Investment Survey (EIBIS) of 12,500 European businesses, recommends that the EU take advantage of historically low interest rates, increase public investment, catalyse private investment and promote efficient financial intermediation to tackle the slowdown.
Commenting on the report’s findings, EIB Vice-President Andrew McDowell said: “Europe cannot afford to wait out another cyclical downturn. After a lost decade of weak investment, we need to tackle the slowdown now if we are to respond to the historic challenges we are facing. The EIB, as the EU’s financial arm and climate bank, has played a crucial role in kick-starting investment in Europe after the financial crisis and we now stand ready to further support investment for a more sustainable and competitive European economy.”
Investment activity in the EU has now recovered from the last recession, with investment up to nearly 21.5 per cent of the EU’s GDP. This is 0.5 percentage points above the long-term average.
However, EIB Investment Survey 2019 data show that EU firms have become more pessimistic about the political and regulatory environment and now expect the macroeconomic climate to worsen.
The number of EU firms planning to reduce investment has risen for the first time in four years. EU firms are also more pessimistic than their US peers, suggesting a rather fragile investment environment in the future.
The EIB Investment Report shows that, although substantial progress has been made, climate action investment in the EU is not yet on track. To achieve a net zero-carbon economy by 2050, the EU must raise total investment in its energy system and related infrastructure from 2 per cent to 3 per cent of GDP on average.
The European Union invested 158 billion euro in climate change mitigation in 2018. At 1.2 per cent of GDP, this is now marginally less than the United States (1.3 per cent) and little over a third of China’s performance (3.3 per cent of GDP).
While the US leads in climate-related R&D spending, China has recently quadrupled its spending, overtaking the EU.
Europe’s weak performance in climate-related R&D is a threat to its competitiveness, given the importance that still-immature technologies will have in the transition, the report said.
The adoption of digital technologies in Europe is slow, with a growing digital divide among firms.
Digital firms tend to invest more, innovate more and grow faster, enjoying first-mover advantage. However, only 58 per cent of firms in Europe are digital compared to 69 per cent in the US, with a particularly strong gap in the service sector (40 per cent vs 61 per cent). 30 per cent of older (more than 10 years old) smaller and medium-sized companies in Europe are persistently non-digital, the report said.
(Photo: Filippo Vicarelli)