Sluggish Corporate Investment Threatens Global Growth: An OECD Perspective

The Organisation for Economic Co-operation and Development (OECD) has warned that weak corporate investment poses a significant threat to global economic growth. The organization noted that corporate spending in most developed economies has not recovered to pre-financial crisis or COVID-19 pandemic levels.

Declining Net Investment Levels

OECD data shows that the average net investment in member countries has fallen from 2.5% of GDP before the 2008 crisis to 1.6% in middle-performing countries, with the pandemic exacerbating this trend. Álvaro Pereira, the OECD's outgoing chief economist, affirmed that countries will be unable to sustain growth if corporate investment in new projects and facilities does not increase.

Varied Performance Among Developed Economies

Out of the 34 developed economies tracked by the OECD, only Israel and Portugal had surpassed pre-financial crisis net investment levels by last year. Only six countries, including Canada, Italy, and Australia, managed to exceed pre-pandemic levels. A report from the organization revealed that average investment levels should have been 20% higher if the pre-financial crisis trend had continued and remain 6.7% below pre-pandemic levels.

Impact of Political Uncertainty

Pereira pointed out that political uncertainty is a major reason for weak corporate investment, as companies face repeated shocks. The OECD stated that the trade policies implemented by the Trump administration led to companies hesitating to make significant spending decisions, resulting in a decline in investment across all major sectors.

The Importance of Sustainable Investment

Pereira emphasized that investment is essential for maintaining economic growth. He stressed that without more investment, it will be impossible to sustain growth in the long term.

Conflict of Interest: Shareholder Returns vs. Investment

Studies have revealed that companies have not taken advantage of lower capital costs after the financial crisis to invest in profitable projects but have instead increased dividend payouts to shareholders. This conflict is evident in sectors such as water companies in the United Kingdom, which have paid out significant dividends to shareholders since privatization, exceeding a third of their infrastructure spending.

Investor Pressure to Cut Spending

Major companies such as BP face pressure from investors to cut spending significantly to ensure dividend payouts to shareholders. This pressure can hinder necessary investments in new and sustainable projects, negatively impacting future growth.

Further Analysis: The Role of Innovation and Technology

In addition to the factors mentioned by the OECD, innovation and technology play a vital role in promoting corporate investment. Companies that invest in research and development and adopt new technologies can achieve significant productivity gains and create new opportunities for growth. Governments can play an important role by providing incentives for companies to invest in these areas.