CFP
Business Investment Rate: an analysis of the recent evolution
The business investment rate has followed a downward trend since 2022. Measured by the ratio between the investment of financial and non-financial corporations to GDP, it declined from 14.1% to 13.1% in 2024. The level recorded in 2022 was close to that observed in 2008, following a recovery path that began in 2013 (Graph 7). In nominal terms, business investment is estimated to have grown by 2.3% in 2024, compared with nominal GDP growth of 6.4%.
This reduction coincided with a period of tighter monetary policy. The decision to proceed with an investment project depends on its expected profitability and the opportunity cost for the investor. In turn, profitability is impacted by financing costs, which affect the present value of future cash flows. Sensitivity to these factors tends to be greater for younger companies (which are more likely to face financing constraints) and for companies producing durable goods.
The increase in interest rates impacted credit demand. This observation is supported by the results of the Bank Lending Survey. Following the post-pandemic recovery, credit demand for investment financing fell sharply between the end of 2022 and 2023, reaching levels previously observed only in the aftermath of the 2008 financial crisis and during the sovereign debt crisis. This decline coincided with a negative contribution from interest rate levels to credit demand. Nevertheless, 2024 was marked by a progressive and significant improvement in demand, which by the end of the year had reached a neutral level for the first time in two years (Graph 7).
Graph 7 – Business investment rate and determinants of credit demand by firms
Investment rate (% GDP)
Factors impacting credit demand by firms (diffusion index)
Source: Statistics of Portugal (INE), Bank of Portugal (BdP), and calculations by CFP. The investment rate is expressed as a four-quarter moving average. The diffusion index ranges from -100 to 100. Values below (above) zero indicate less (more) restrictive criteria. A value of zero corresponds to virtually no change.
Qualitative business surveys by INE (National Statistics Institute) suggest that the evolution of business investment in 2025 will be similar to that of 2024. The biannual qualitative questions on investment, published in October 2024, for both manufacturing industry and services, provide insight into firms’ assessments of investment carried out and planned. In both cases, the balance of extreme responses[1] for planned investment in 2025 is positive, although slightly lower than the assessment of investment carried out in 2024.
Portugal’s outlook remains more favourable than that of other EU Member States. Looking at the investment survey results compiled by the European Commission (EC), particularly for the manufacturing sector, there is a notable deterioration in investment expectations between 2023 and 2024, with business assessments turning negative across the EU, and especially in Germany (Chart 8). This reflects a higher proportion of companies expecting a contraction rather than an expansion of their investment, for example, in the replacement of facilities or equipment, capacity expansion, or process optimization. The outlook for 2025 in Portugal and Spain is significantly better than the assessments reported between 2015 and 2019, which is not the case for countries like France and Germany, or for the EU average, an element that accompanies similarly more favourable economic growth projections.
Graph 8 – Investment plans in the manufacturing industry and capital stock of non-financial corporations per worker
Investment plans in the manufacturing industry (balance of responses)
Capital stock of non-financial corporations per worker in 2022 (thousands of euros per worker)
Source: European Commission, Eurostat, and calculations by CFP.
Increasing business investment—and therefore the stock of capital available per worker—is essential for boosting productivity in Portugal. In 2022, the capital available per worker (or capital intensity) in Portugal was the third lowest value in the euro area[2], corresponding to around 50% of the euro area average (Graph 8)[3]. Capital intensity is a key metric in determining labour productivity, as it reflects access to more modern machinery and equipment, more efficient infrastructure, and advanced technologies.
[1] Difference between the percentage of responses indicating an increase in investment minus the percentage of responses indicating a contraction.
[2] Calculated excluding residential stock. Ireland is also excluded due to the distortion introduced by intangible assets of multinationals headquartered in the country. See Honohan (2021).
[3] Alternative metrics exhibit a similar pattern. For example, according to estimates at 2010 purchasing power parities, Portugal shows a level corresponding to 65.0% of the euro area average. See Bergeaud et al. (2016).
*Article originally published in CFP report 02-2025, "Economic and Fiscal Outlook 2025-2029".
Date of last update: 24/04/2025
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Contraciclo is a forum for the views of the Portuguese Public Finance Council (CFP) staff and members on economic issues. The views expressed are those of the author(s) and do not necessarily represent the views of the CFP. Therefore, they cannot be attributed to the CFP or to the Senior Board under no circumstances.
