Does underinvestment threaten growth?

Does underinvestment threaten growth?

09-11-2017 | Jaarlijkse vooruitblik
The notion that investments by the private sector are lacking is popular nowadays – but things may not be as bad as they seem.
  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

The apparently low level of investment is one factor explaining the dismal productivity growth figures and the sluggish economic recovery. Cash-rich companies with boards motivated by the wrong incentives are more interested in pushing up the share price with share buy backs than anything else, and due to weak sales prospects, they are reluctant to invest for the longer term.

Over-indebted governments are taking the political path of the least resistance and cutting back on public investment. Sounds convincing, doesn’t it? When it comes to the public sector, there is certainly some truth to this idea.

Investment outlook 2018
Investment outlook 2018

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Source: FRED database

As highlighted by IMF in its recent World Economic Outlook, public investment in infrastructure in advanced economies has dropped to near historic lows as a percentage of GDP after decades of almost continuous decline. The low interest rate environment does offer excellent opportunities to improve the quality of the existing infrastructure stock. According to the IMF, countries with deficits in infrastructure spending include Australia, Canada, Germany, the UK and the US. The fund suggests that upgrading surface transportation and improving infrastructure technologies (in high-speed rail, ports, telecommunications, broadband), as well as green investments should be given priority. Probably not much can be expected from the Anglo-Saxon countries in the short term, but the new German government will most likely increase infrastructure investment for the next year.

In terms of gross fixed capital formation in advanced economies, 2016 wasn’t such a bad year, with a growth rate of 1.7% compared to an average of only 1.1% from 2009 to 2018 (which includes the 11% drop in 2009). It was also only slightly worse than the average of 2.3% from 1999 to 2008. The differences between the countries were relatively large, with the UK and the US figures being particularly weak (0.6% and 0.5%, respectively).

Global investment has picked up since the third quarter of 2016 and the IMF expects (conventionally) that growth of gross fixed capital formation in advanced economies will rise to a strong 3.4% next year. The composition is of course important as the worst investment binges are generally linked to the property sector. Fortunately, so far, residential investment has not been a key contributor to the growth rate.

Another way to assess investment is to look at the figures for Research and Development spending as a percentage of GDP. For the OECD as a whole, the ratio of gross domestic spending on R&D (total expenditure (current and capital) on R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a given country has been pretty stable since 2000 (starting at 2.1%), showing a slightly upward trend reaching 2.4% of GDP in 2015.

The Financial Times recently pointed out that US companies are now spending 1.73% of GDP on R&D compared to the then all-time high of 1.67% in Q1 2000 during the dot-com bubble. This does not seem to suggest that the reluctance to invest is in fact as extreme as some make it out to be.

This article forms part of the Robeco 2018 outlook entitled Playing in Extra Time.

Investment outlook 2018
Investment outlook 2018

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