British companies are investing less in their domestic economy than almost all other G7 companies, reinforcing long-standing concerns about productivity and growth as rising energy costs put new pressure on the industry.
Analysis by the Institute for Public Policy Research (IPPR) shows that private sector investment in the UK was just 11.1 percent of GDP in 2023, the second lowest in the G7, ahead of only Canada at 10.8 percent.
In comparison, Japan leads the group with investment amounting to 18.2 percent of GDP, followed by France at 12.6 percent and Germany at 11.9 percent, highlighting the extent of the UK’s relative underperformance.
The results highlight an ongoing structural problem. The UK has consistently ranked at the bottom of the G7 list for business investment since the global financial crisis and has been below the group average every year since 2001.
According to IPPR, this chronic underinvestment has been slowing productivity growth for years and limiting companies’ ability to expand capacity, introduce new technologies and improve efficiency.
One of the clearest indicators of this gap is capital intensity, which is the amount of equipment and infrastructure available to workers.
The report estimates that British workers have 38 percent fewer tools at their disposal than their counterparts in other advanced economies, and in the manufacturing sector this figure rises to 47 percent. This shortage, often referred to as the “capital gap,” is seen as a major constraint on productivity and competitiveness.
High energy prices are identified as a key factor inhibiting investment. British companies face the highest electricity costs in Europe, a situation that has worsened following the recent rise in global gas prices linked to geopolitical tensions in the Middle East.
Pranesh Narayanan, a senior research fellow at IPPR, said companies were caught in a “double pressure”.
“Companies are under-investing and at the same time struggling with the highest electricity costs in Europe, and the two are closely linked,” he said.
Rising energy costs not only increase operating costs, but also reduce the incentive to invest in new plants or equipment, especially in energy-intensive industries.
The report calls for adjustments to the government’s planned British Industrial Competitiveness Scheme (BICS), which is expected to reduce electricity costs for around 7,000 factories by up to 25 percent when introduced in 2027.
The IPPR argues that the program should be more targeted and focus on sectors where lower energy costs are most likely to spur new investment and drive long-term growth.
“Given the limited financial space, support should be directed where it can create new factories, new equipment and new jobs,” Narayanan said.
The UK’s low investment rate has a significant impact on economic performance. Without sufficient capital investment, companies struggle to increase productivity, which in turn limits wage growth and overall economic expansion.
The problem is particularly acute at a time when the economy faces additional headwinds from inflation, higher borrowing costs and global uncertainty.
The latest findings highlight the urgency of closing the UK’s investment gap, particularly as global competition increases and technological change accelerates.
While policy initiatives to reduce energy costs and support industry could be helpful, the scale of the challenge suggests a broader, long-term strategy is needed.
For businesses, the investment decision depends on confidence in the economic environment and operating costs in the UK. The task for politicians is to create conditions that make such investments both profitable and attractive.
Without sustained improvement, the UK risks becoming stuck in a cycle of low investment, weak productivity and subdued growth, a challenge that has persisted for more than a decade.
