EY report: European FDI recovery stalls

Slow economic growth, spiralling inflation, soaring energy prices and a tense geopolitical environment caused the first downturn in European foreign direct investment (FDI) since 2020, according to the latest EY Europe Attractiveness Survey. Declining demand for new offices resulting from increased remote working also dented investment, the report said.

After two successive years of growth, the post-COVID-19 pandemic recovery of FDI in Europe has stalled: 5,694 FDI projects were announced in Europe in 2023, down 4% from 2022. Measured by the number of announced projects, FDI remains 11% below the level in 2019, just before the pandemic hit Europe, and 14% below the record high of 2017. The number of jobs created by FDI projects in 2023 fell sharply, down 7% compared with 2022.

The number of regional headquarters in Europe fell by more than half (51%) in 2023 as demand for large office space declined post-pandemic. The success of the US Inflation Reduction Act may also have diverted some investment from Europe to the US, EY said. The number of projects announced by US companies in Europe fell by 15% in 2023.

Among European countries, France attracted the most investment despite a 5% annual decline in the number of projects. The UK ranked second, where the number of projects jumped 6%. Germany came third following a 12% fall in investment. At city level, investors rank London as the most attractive city for investment; Paris is a close second.

Despite the regional decline in FDI, foreign investors remain optimistic about Europe in the long term, the survey found. More than seven in 10 (72%) businesses plan to expand or establish operations in Europe in the next year, an increase from 67% last year. In parallel, three-quarters think Europe’s attractiveness will increase during the next three years.

However, most new projects in the next 12 months will focus on expanding existing assets, rather than the new greenfield developments associated with high-potential industries such as electric vehicles, life sciences, digital technology and renewable energy.
 
And EY warned, in its recap of the report: “There are clear risks on the horizon: increased regulatory burden and red tape, energy prices and supply issues, and political instability in a multi-election year. Urgent action is needed in these areas to address investors’ concerns and ensure Europe’s future attractiveness.”