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MACRO ANALYSIS: Lack Of Foreign Investment Has Weighed On EZ GFCF

MACRO ANALYSIS
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The downward trend in foreign capital inflows will have contributed to the weak development of aggregate Eurozone investment growth i.e. gross fixed capital formation (GFCF). In Germany, the level of GFCF was lower in Q2 2024 than Q1 2019. 

  • Trends for France and Spain are not much better, while Italy is the notable outperformer. However, this is due to the “Superbonus” home renovation tax credit, which saw much higher take-up than expected after its 2020 introduction. The scheme is currently being phased out (due to its sizeable fiscal impact), and the 2024 Italian GDP data suggests that the “Superbonus” tailwind has already started to fade.
  • The ECB projects investment to fall 0.5% Y/Y in 2024, before recovering to 1.2% in 2025 and 2.1% in 2026. From the September macroeconomic projection write-up: “Business investment is projected to grow at a moderate but increasing pace over the projection horizon amid improving demand, a fading negative impact from financing conditions and rising green and digital investment”.
  • The need for increased public and private sector investment was highlighted forcefully in Mario Draghi’s recent report on Eurozone competitiveness. The three areas Draghi highlighted to “reignite sustainable growth” in the region were (1) Closing the innovation gap with the US and China, (2) a joint plan for decarbonisation and competitiveness” and (3) increasing security and reducing dependencies.
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The downward trend in foreign capital inflows will have contributed to the weak development of aggregate Eurozone investment growth i.e. gross fixed capital formation (GFCF). In Germany, the level of GFCF was lower in Q2 2024 than Q1 2019. 

  • Trends for France and Spain are not much better, while Italy is the notable outperformer. However, this is due to the “Superbonus” home renovation tax credit, which saw much higher take-up than expected after its 2020 introduction. The scheme is currently being phased out (due to its sizeable fiscal impact), and the 2024 Italian GDP data suggests that the “Superbonus” tailwind has already started to fade.
  • The ECB projects investment to fall 0.5% Y/Y in 2024, before recovering to 1.2% in 2025 and 2.1% in 2026. From the September macroeconomic projection write-up: “Business investment is projected to grow at a moderate but increasing pace over the projection horizon amid improving demand, a fading negative impact from financing conditions and rising green and digital investment”.
  • The need for increased public and private sector investment was highlighted forcefully in Mario Draghi’s recent report on Eurozone competitiveness. The three areas Draghi highlighted to “reignite sustainable growth” in the region were (1) Closing the innovation gap with the US and China, (2) a joint plan for decarbonisation and competitiveness” and (3) increasing security and reducing dependencies.