Investment activity in Germany is weak by international comparison

• Private-sector investment is 8.3% below 2019 level
• Public-sector investment dynamic is positive but low as well
• KfW CEO Stefan Wintels: “We must act to maintain competitiveness”

Germany is at risk of being overtaken by other countries in private and public-sector investment. In the third quarter of 2024, corporate investment in Germany was 6.5% and total private-sector investment 8.3% below the end-2019 level on a price-adjusted basis. In the US, on the other hand, private-sector investment has grown continually after a brief slump at the beginning of the pandemic and is now around 14% above the fourth-quarter 2019 level, the last quarter before the outbreak of the COVID-19 pandemic. In France and Japan, too, investment growth has been much stronger than in Germany since the beginning of the decade.

These are the findings of a comparative stock-taking survey of investment activity conducted by KfW Research.

“Private and public-sector investment is the key to competitiveness and growth. It is also an indispensable prerequisite for achieving the climate targets. Given the weak investment dynamic, we must act as a matter of urgency. KfW will fulfil its responsibility and effectively support businesses, households and municipalities in their projects even in difficult times”,

said Stefan Wintels, Chief Executive Officer of KfW.

A look at selected investment categories reveals the following:

• In the third quarter of 2024, investment in plant and equipment in Germany was around 9% below the 2019 level on a price-adjusted basis. In France it was also 8% below the pre-crisis level. In the US, however, it was 11.5% above the pre-crisis level and in the EU as a whole it was 1% higher. Investment in plant and equipment comprises investment in machinery, equipment and vehicles – expenditure that is important for maintaining and expanding production capacities or using resources sparingly.
• The growth of investment in intellectual property (R&D expenditure as well as software investment) is also lower in Germany than in other countries. While in Germany the private and public sector invested 11.2% more in intellectual property in the third quarter of 2024 than at the end of 2019, in the US investment in this area was 36% above the baseline level. It increased by 26.9% in France as well. This means Germany has fallen behind in an investment category that is particularly promising precisely at the dawn of an emerging AI revolution.
• Residential construction in Germany is now around 13% lower than at the end of 2019, roughly the same decline as in France. In the US and the EU, on the other hand, investment is up by a good 1% each. So although investment momentum has faced identical headwinds from central banks' interest rate increases, in Germany it was particularly weak in this category as well.
• Even so, public-sector investment in Germany was still 1.6% higher on a price-adjusted basis than at the end of 2019. However, it is still around 9% below the level that would have existed if the growth trend from 2016 to 2019 had continued. By way of comparison: In the US the public sector recently invested some 15% more than in 2019.

While public-sector investment can be directly steered through policy, business investment must be incentivised by removing investment barriers or providing support options. In order to identify the most important levers for this, KfW Research has compared the results of four current business surveys.

Particularly remarkable is the fact that energy and wage costs are always high on the list of investment barriers. Skilled labour shortages typically rank on a similar level. Regulatory density, bureaucracy and legal requirements are also mentioned as obstacles particularly often. Where surveyed, the tax and fiscal burden ranks midrange. Insufficient funding opportunities or unfavourable financing conditions and infrastructure are regarded as a problem less often.

In two of four survey studies, however, the main barrier to investment mentioned was not one of the usual locational criteria but the “overall economic development” or the “poor macroeconomic environment”.

The study can be downloaded from www.kfw.de/fokus.