Data published by Eurostat shows that profitability of non-financial corporations in the Euro-zone edged up to 38.8% in the 3rd quarter;  the growth is thanks to a slight downward revision to the Q2 figure.  The business investment rate rose to 21.9%, matching the level seen at the end of 2023 and the final two quarters of 2017.

The gross investment rate of non-financial corporations is defined as gross fixed capital formation divided by gross value added – this ratio relates investment in fixed assets (buildings, machinery etc.) to the value added created during the production process.  The rise in the investment rate was because business gross fixed capital formation grew more rapidly (+3.7%) than gross value-added (+1.4%).

Despite this improvement in the investment rate, it remains at a relatively low level;  other than the Q2-24 figure of 21.4% and the periods that we noted above that matched the latest value, we have to go back to 2015 to find lower ratios.  The long-run average (back to 1999) for the Euro-zone investment ratio is 22.6%.  However, the investment ratio can be affected by large imports (or exports) of intellectual property products reflecting globalisation;  this particularly affects Ireland where the presence of large multi-national headquarters operations makes their data very volatile and this does affect the calculation of the long-run average.

The profit share of non-financial corporations is defined as gross operating surplus divided by gross value added.  This shows the share of the value added created during the production process remunerating capital and it is the complement of the share of wage costs (plus other taxes minus other subsidies on production) in value added.  In the latest figures, the marginal improvement in profitability is explained by the business compensation of employees (wages and social contributions) plus taxes less subsidies on production rising (+1.2%) at a slightly slower pace than the increase in gross value added (+1.4%).

As with the investment ratio, this is below long-run average and, at best, marks a flattening of the curve following the downward trend that has been running since the peak of 41.5% that we saw at the start of 2023.

You can get the full details from the Eurostat News Release which can be downloaded from their website at https://ec.europa.eu/eurostat/news/euro-indicators (13 January – listed as “household saving rate” which is part of the same document) or requested from MTA.

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