Companies reduce investments by 8.4 percent due to higher interest rates

The financing conditions for companies have deteriorated significantly since summer 2022 due to the European Central Bank's key interest rate hikes. On average, companies in Germany have reduced their originally planned investments by 8.4 percent over the past year and a half due to the higher interest rates. This is the finding of the ifo business activity surveys (ifo Konjunkturumfragen) from December 2023.

Investments in energy efficiency and renewable energies have seen a similarly significant decline as overall investments. Companies have also significantly reduced investment in research and development, albeit to a lesser extent.

There are also differences depending on the sector. In construction in particular, companies reduced their investment plans due to higher interest rates. The decline in investment here was just under 10 percent. Companies in the trade sector are also investing less than average at 9.3 percent. The manufacturing industry invested 8.2 percent less. Among service providers, the decline was below average at 7.4 percent.

There are also differences in terms of company size: small companies with up to 50 employees are investing significantly less due to higher interest rates (minus 9.9 percent), while companies with 250 employees and more have not reduced their investments as much (minus 5 per cent).

The decline in investment, particularly in R&D and green investments, is in conflict with long-term growth prospects and climate policy goals.

Ifo Research Director Benjamin Born, Professor of Macroeconomics at Frankfurt School: “In a difficult interest rate environment, flanking fiscal measures should be taken to protect the transformation of the economy and long-term growth prospects. This could be achieved, for example, through accelerated tax depreciation and targeted subsidies. It is also crucial to reduce political uncertainties, which in combination with higher interest rates are often a reason for reducing investment.”

You can find the full ifo Institute article here.