The UK Investment Puzzle

This is a preview from the National Institute Economic Review, August 2017, no 241

Ahead of the forthcoming issue of the National Institute Economic Review (NIER no. 241) that will be published on Wednesday 2nd August, we release a series of boxes, each of them looking at specific aspects of economic and social policy.

This Box, prepared by Rhys Williams, NIESR Research Assistant, focuses on the UK investment puzzle.

"There was a 20% fall in the real level of business investment following the global financial crisis – the largest in post-war history. This is almost 50% deeper than previous crashes in investment one year after the onset of recession, highlighting the scale of the 2007 downturn.(...)

One immediate explanation for this investment puzzle is uncertainty, with a recent Bank of England survey reporting the largest “major obstacle” to investment was uncertainty and so this plays a role in explaining some of the weak investment. However, uncertainty can often be a broad and vague concept, used as a catch-all to explain everything we do not understand about investment. We therefore emphasise that our focus is on firm-level uncertainty, one measure of which is the volatility in earnings which tells us uncertainty about future demand conditions".