6 minutes

The puzzle of low investment rate in the economy – a different perspective

In recent years, the issue of low investment levels, especially the decline in the so-called investment rate (investment expenditure to GDP), is often raised in Poland. There is still no good explanation for such a situation, at least I have not come across one. In this post, I would like to propose a slightly different view. Perhaps it will shed new light on the investment processes taking place in Poland.

If we look at the investment rate* at the aggregate level (left part of fig. 1), it confirms that there is reason to complain: both against the so-called “old EU” and the new member countries, the investment rate shows disturbing tendencies. In particular, in recent years it has stopped following the fairly uniform cycle so far – our rate is falling when it is rising in the peer countries.

To diagnose the reasons for this phenomenon, it is worth looking at investment expenditures in individual sectors. Let’s start with the non-financial corporate sector (fig. 2).

The first significant thing that strikes the eye is the fact that although this sector accounts for a large part of GDP generation in Poland, its share in GDP is surprisingly low compared to other countries. Another noteworthy issue: the investment rate in this sector – the ratio of its expenditures to the value added generated by it – has always remained lower than in the countries of the region, and in recent years it is also lower than in the EU14. The main reason for this change is primarily the increase in the investment rate “there”, not its decline “here”. A clear exception is 2021, where the rate in Poland fell sharply.

Due to the fact that investments of non-financial companies have accounted for over 50% of total expenditures in recent years, what happens with their investments heavily weighs on the result of the entire country. In this context, nonfinancial companies contributed to the decline in the investment rate in selected years (especially in 2021), but it is hard to blame them for the downward trend as such. Further reasons must therefore be sought in other sectors.
As for the financial corporate sector (fig. 3), it is worth emphasizing that:

  • The share of this sector in GDP and investments is small (respectively 3.5% and 2.5%), similar to that in other countries,
  • While until 2016 the investment rate did not differ from that in other countries, in the following years it remained clearly lower. This may suggest the impact of increasing burdens imposed on financial institutions (especially banks) on their ability and willingness to invest.

Importantly, from the point of view of the general picture of investments, also financial companies could not generate a general downward trend – their rate did not decline during the analyzed period, and besides, the share of this sector in GDP and investments is small.

The next sector is the government sector (including local governments). Its share in total investment outlays was around 20-25% in recent years. In the case of this sector, the situation is specific, as investment outlays have a much different, broader context. Their task is to serve the entire economy and society, so relating them to the value added specifically generated in this sector makes much less economic sense. However, it is worth noting that the share of the government sector in GDP in Poland does not significantly differ from the “old EU”, and at the same time, the distance to the countries of our region has increased in recent years (fig. 4). The investment rate remains relatively high. This is not where the sources of the general trend should be sought.

Finally, the household sector (including so-called non-commercial institutions, popularly known as NGOs**). Here the situation is definitely the most interesting. First, the share of this sector in generating added value in Poland is surprisingly high (fig. 5). Second, in recent years there has been a huge divergence in terms of the level of investment of this sector compared to other countries, both due to the increase in investment rate “elsewhere”, as well as its decline in Poland. This is very significant for the aggregated investment rate – investments of the household sector constituted on average over 20% of total outlays in recent years.

Of course, the question arises about the reasons for the decline in the investment rate of the household sector in recent years. I don’t have an answer to this question. Only a few hypotheses come to mind, but before I get to them, it’s worth recalling the definition of this sector. It includes: individuals working on their own account in individual farms in agriculture and individuals working outside individual farms in agriculture with a number of workers up to 9 and keeping simplified accounting records, as well as individuals earning income from salaried work and non-earning sources (Source: Central Statistical Office, Poland).

This means that in the case of investments, we are dealing with a mixture of investments of households as such (mainly in the real estate market) and investments related to this part of economic activity that is classified to this sector (agriculture, micro/small companies). Partial (available only for 2017-2020) data, at the level of subsectors of the household sector, indicate that basically the entire decline in investments took place in the area of non-agricultural economic activity. In this case, several hypotheses can be made:

  • In a situation of “pressure” (especially fiscal, e.g., audits, but also market – the end of the era of cheap labor) many of these companies stop coping, reduce investment outlays and only struggle to prolong agony,
  • The better companies from this segment started to migrate on a larger scale than in the past (due to size or through a change of legal form) to the sector of financial/non-financial companies,
  • Considering the significant role of EU grants in this segment, another hypothesis associates the decline in investments with the cycle of EU funds, although the period of “collapse” seems too long from this perspective,
  • Perhaps as part of the fight against VAT and CIT gap, some fictitious purchases of equipment (e.g., IT) recorded in statistics as investments were eliminated.

In summary, the behavior of investment rate in Poland in recent years cannot be explained without looking at the level of sectors (and even subsectors). In the case of enterprises (both financial and non-financial), the lack of their rebound in recent years and following the overall European trend is particularly worrying. The biggest unknown, however, relates to micro companies, where investments, both in nominal terms and in relation to added value, have fallen sharply. It’s hard to give a definitive answer about the causes of such a situation. Much suggests that numerous regulatory and tax changes lead to drastic – including formal-legal – transformations in this part of the economy. Such a situation does not encourage investment. However, these may not be the only reasons.

*due to the lack of data for sectors and subsectors in constant prices, all compilations are based on current prices. The quantities for EU14 and CEE10 are based on aggregates (sum of GDP and outlays), not averages for quantities in individual countries.
** their scale and impact is negligible

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