European Central Bank research finds a 1% energy price shock can cut EU firms’ capital spending by 4.1% and R&D by about 1%

The European Central Bank published research in its Economic Bulletin examining how energy price shocks affect EU corporate investment and the potential implications for productivity and future competitiveness. Using oil supply news shocks as a proxy for broader energy shocks, the analysis finds that higher energy costs reduce both fixed capital investment and research and development, with larger effects for firms in energy-intensive sectors and for financially constrained firms. Firm-level estimates using balance sheet data for publicly listed EU firms (Standard & Poor’s Compustat, 1999-2022) show that a shock normalised to raise the producer price index for energy by 1% reduces capital expenditure by 2.9% on impact and 4.1% after one year, while R&D expenditure falls by around 0.85% on impact and after one year. Macro results point to gross fixed capital formation reaching a trough of -1.5% after two years and investment in intellectual property products (including R&D) declining by 1% after two years. The article highlights the EU’s exposure to imported energy and electricity pricing dynamics, noting that gas-fired power plants generated 19% of EU electricity in 2022 but set the price 55% of the time, and it reports that energy-intensive industries account for around 45% of industrial energy use while representing less than 4% of EU gross value added in 2021; financial constraints are proxied by firms under 20 years old with leverage above the sample median.