UK investment in intangibles held up in 2020 despite a huge drop in GDP
By all accounts, one might have expected capital investment in the economy to crash in 2020: enormous uncertainty will have put many projects on ice; some businesses will have been cash constrained; and foreign direct investment might have been hit by both COVID-19 and Brexit. Gross fixed capital formation did fall by around 9.1%— from £400 billion in 2019 to £360 billion in 2020 (in 2019 currency). However, this was slightly less than the fall in GDP (at around 9.7%). So all in all, not as “bad” as one might have feared.
The attached chart shows some more detail, breaking the totals into types of assets and the sectors making the investments. A fascinating feature of the pandemic was the degree to which it (on balance) accelerated technology adoption and digitisation. For example, in one survey, McKinsey found that nearly 60% of all customer interactions across all sectors were digital during the COVID pandemic — up from around a third in 2019. Consequently, businesses spent a lot of money investing in ICT in 2020.
For the UK, this shows up in the left-hand panel of the chart. While capital investment in buildings and structures (e.g., car parks) and houses dropped a fair bit, investment in software stayed essentially stable from 2019 to 2020. Looking at the right hand panel of the same chart, we can see that this pattern of software investment was replicated in most sectors of the economy, with only a slight dip in manufacturing and the retail and wholesale sectors.
Another type of investment which held up, or even increased, during the pandemic was research and development. Some of this reflects an increase in R&D for vaccines against COVID-19, but increases in R&D were also recorded in other manufacturing sectors, such as motor vehicles and other transport equipment (perhaps relating to the expected dramatic shifts in transportation as the various countries moves towards net-zero green-house-gas targets in 2050). The ICT sector itself invested more in R&D in 2020 than it did in 2019, presumably in order to keep up with rapidly increasing customer demands (including, for example, for cyber-security).
From a labour productivity perspective, these figures provide quite a bit of comfort. As we argued in our report on the UK’s productivity puzzle, not all types of capital are created equal. If one only cared about productivity (which we of course don’t), one might be a little more relaxed about a reduction in capital investment into housing or structures (but less so about the reduction in machinery and equipment).
In realitly, though, the contribution of capital deepening (or shallowing) to changes in productivity (or productivity growth) is extremely situation-specific, and depends not just on the quantity of capital and labour, but also their quality. We should therefore avoid sweeping statements, especially since there will have been many other things in 2020 (including, for example, loss of skills among those furloughed) that are likely to weigh on productivity growth in the near future. Nevertheless, having previously been a bit of a productivity pessimist, this gives me reason to slightly amend my views.
