UK business investment growth trails U.S. pace, widening productivity gap

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UK business investment lags U.S.

Highlights

UK business investment rose 11 per cent from Q4 2019 to Q1 2024, compared to a 28 per cent increase in U.S. non-residential private investment.
Sixty per cent of UK mid-sized business executives polled by BDO plan to halt or reduce investment amid Middle East instability, rising to 69 per cent in retail and technology sectors.
OECD forecasts U.S. private non-residential investment growth through 2026 to be over four times higher than in the UK, underpinning a widening productivity gap.

Investment trends since the pandemic

As reported by Financial Times, preliminary figures released with GDP data on Thursday show UK business investment is 11 per cent higher in the first quarter than in Q4 2019, compared with a 28 per cent rise in U.S. non-residential private domestic investment over the same period.

Over the year to the end of the first quarter, UK business investment is down 1.8 per cent, while the U.S. records a 5.8 per cent increase. The U.S. gain is supported by AI-related spending, including 10 per cent annual growth in intellectual property investment and a 24 per cent rise in information-processing equipment.

UK data is volatile and often revised, but the longer-term contrast remains sharp. After years of weakness following Brexit and the pandemic, UK business investment in 2026 is only 11 per cent above its level in the first quarter of 2016, versus 52 per cent growth in the U.S.

Fhaheen Khan, an economist at Make UK, says the country remains an OECD outlier for weak capital expenditure, especially in modern technologies such as robotics and automation. Peter Dixon of the National Institute of Economic and Social Research says U.S. investment is being lifted by the IT sector and that UK gains in intellectual property are not matching that momentum.

Economic risks and policy implications

New figures published on Sunday by BDO show that UK mid-sized businesses are pausing investment plans because of the impact of the war in Iran. In a survey covering the four weeks to May 11, 60 per cent of executives at firms with revenue of £10 million to £500 million say they plan to halt or reduce investment until the Middle East situation stabilizes.

The share rises to 69 per cent in retail and technology and 67 per cent in financial services. The findings follow Bank of England warnings of falling business investment in the first half of the year.

The OECD last month identified weak business investment as a factor behind the UK's low productivity and sluggish GDP per capita growth, and called for steps including better skills, stronger labour mobility and a simpler tax system. OECD-standardized figures also show private non-residential investment is expected to grow more than four times as fast in the U.S. as in the UK over the decade to 2026.

Although the Labour government last year set out a 10-year industrial strategy focused on areas including life sciences and advanced manufacturing, political uncertainty has increased after poor local election results for Prime Minister Sir Keir Starmer. Economists also note that much of the UK's investment rise in 2025 is concentrated in utilities, rather than in the kinds of technology-heavy spending that could deliver a stronger lift to long-term productivity and living standards.

In our earlier coverage of Morningstar DBRS affirming the UK’s AA credit rating with a stable trend, we explained that the rating is supported by strong institutions and financing flexibility, but constrained by high public debt, a structural deficit, and renewed energy-price pressures. We also noted that growth is expected to remain modest while the Bank of England stays cautious on rates amid inflation risks and spillovers from Middle East tensions, alongside political and execution risks for the government’s longer-term agenda.

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