Definitions and GDP impacts
Gross fixed capital formation (GFCF) is the investment part of the expenditure model of GDP described under ‘Why trade matters’ in the section on economic context.
Investment is a key driver of future prosperity. It is important for the demand side of the economy, but it also affects the supply side, because of the link between investment and productivity growth.
GFCF is an estimate of net capital expenditure by both public and private sectors. It includes business investment which is usually just over half of UK GFCF.
- Examples of GFCF include spending on plant and machinery, transport equipment, software, new dwellings and other buildings, and major improvements to existing buildings and structures, such as roads.
- In 2018, the stock of GFCF accounted for £397 billion in 2019 prices (18% of GDP), including business investment of £224 billion (56% of GFCF and 10% of GDP).
Both GFCF and business investment are measures of domestic investment. The key measure of foreign investment in the UK is Foreign Direct Investment, which we discuss separately.
Economic models typically assume that a 3% increase in capital formation leads roughly to a 1% increase in GDP. This means that if GFCF is subdued, the cumulative long-term effects on the economy are substantial and take a long time to reverse.
UK as a low investment nation
The UK has the lowest rates of investment of any G7 economy, according to analysis by IPPR (2024).
The latest comparable data for the year of 2022 shows business investment, by private companies, is lower in the UK than any other G7 country, for the third year in a row. The analysis also shows that the UK ranks a lowly 28th for business investment out of 31 OECD countries.
Countries like Slovenia, Latvia and Hungary all attract higher levels of private sector investment than the UK as a per cent of GDP. Only Greece, Luxembourg, and Poland see lower business investment than the UK. This includes investment in things like factories, equipment and innovation.
Looking beyond just private capital to total investment (including public, private, household and non-for-profit investments) the UK is still at the bottom of the G7. In fact, the UK has had the lowest level of investment in the G7 for 24 of the last 30 years.
The last time the UK was ‘average’ in the G7 for total investment was in 1990. If the UK had maintained an average position over the last three decades, there would have been an additional £1.9 trillion worth of investment into the country (in real terms).
Brexit impact
Since the recovery from the pandemic, the post-Brexit growth of GFCF and business investment has been slower than pre-Brexit (Figure 7.1). This is not surprising given the political uncertainty caused by Brexit, short-term government policymaking and new trade barriers.
Figure 7.1: Gross fixed capital formation and business investment 1997 – 2025 (ONS)
There is a consensus the at Brexit has reduced business investment by around 10%-12%. Some estimates are higher, for example, NBER recently identified a 12-18% reduction in business investment: 18% on a macro-economic basis and 12% on a micro-economic (firm-level) basis (see left-hand panel in Figure 7.2, published for a speech by Bank of England).
The reduced growth in investment combines with post-Brexit trade effects to reduce productivity.
Figure 7.2: Estimated impact of Brexit on investment
