European companies are becoming increasingly pessimistic about the economic outlook and are also falling behind the US and China regarding investment in climate change mitigation, according to the new report from the European Investment Bank (EIB).

Although firms still have a positive investment outlook for 2019, it’s less so than a year ago, according to the report. The share of companies saying they will reduce investment in 2019 rose for the first time in four years for both manufacturing and exporting firms.  Compared with last year, the investment outlook deteriorated in nearly all EU countries, with the most significant declines reported in Cyprus, Italy and Hungary. Firms in Ireland are also considerably pessimistic about their future investment activities.

The EU economy’s current expansion is now in its seventh year, and the report said that although the region has recovered from the last recession it may be on the cusp of a cyclical downturn. EIB data show that EU firms have become more pessimistic about the political and regulatory environment and now expect the macroeconomic climate to worsen.

“Europe cannot afford to wait out another cyclical downturn,” EIB Vice President Andrew McDowell said in a statement. “After a lost decade of weak investment, we need to tackle the slowdown now if we are to respond to the historic challenges we are facing.”

The EIB says the economic climate is worsening as real GDP growth has slowed during the last year in line with falling export demand and weakening manufacturing output. Trade disputes and Brexit are also contributing to rising uncertainty and deteriorating expectations regarding the economic environment and investment outlook.

Although the impact of slowing GDP growth on investment has been limited so far, the report warned that this is likely to change as the slowdown spreads to the service sector. The EIB said the slowdown in manufacturing production and exports did not have a material impact on investment in 2018 and early 2019.  But it said a slowdown in investment may develop later in 2019 and 2020 as “uncertainty mounts, international trade conflicts escalate, and the economic outlook deteriorates.”

The report also found that the EU is falling behind the US and China in terms of investments in climate change mitigation. These investments comprise 1.2% of EU GDP, compared with 1.3% for the US, and 3.3% for China. The EIB said investments in renewable energy have fallen, in part due to cost reductions, while the transportation sector remains largely fossil fuel-based.

“Europe leads in energy efficiency investments, but investment in lower-carbon transport – particularly rail – is much higher in China and the United States,” said the report. It also said that “transport is expected to become the largest source of greenhouse gas emissions beyond 2030.”

The EIB also said Europe’s weak performance in climate-related research and design is a threat to its competitiveness, given the importance that still-immature technologies will have in the transition to a carbon-free economy. The report found that the US leads climate-related R&D spending, but that China has recently quadrupled its spending to overtake the EU.

To reach a net zero-carbon economy by 2050, said the report, the EU will have to increase its investment in its energy system and related infrastructure from around 2% to 3% of GDP. The EIB said this will require mobilization of private investment, and that even more will be needed when all investments to decarbonize the transport sector are considered. It also said that approximately two-thirds of investment will have to come from energy users, including for building insulation, improved industrial processes, and new transport technologies.

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Tags: Andrew McDowell, Climate Change, EIB, European Investment Bank, net zero-carbon economy