The Key to Raising Business Investment: Keep Pushing the Accelerator

IMF Blog, July 20, 2015

Source details

Canonical URL: The Key to Raising Business Investment: Keep Pushing the Accelerator

Question posed: Why have businesses in advanced economies not been investing more in machinery, equipment and plants?
Main conclusion: Business investment has been weak because economic activity has been weak; ensuring a recovery in sales and sales prospects is the key.
Analytical basis: A study published in the April 2015 World Economic Outlook finds that virtually all of the weakness in business investment in advanced economies since the crisis can be explained by the weakness in the economic environment, consistent with the "accelerator effect" (investment responds to changes in output and sales).
Methodological note: The study isolates the effect of weak growth on weak investment from other influences using a novel statistical approach.

Firms cut investment more severely following the crisis than in previous recessions, but the contraction in overall economic activity was also much more severe.
All told, the joint behavior of business investment and output has not been that unusual.
Longer-term forces clouding the horizon include:
- Aging populations and lower productivity growth.
- Weak banks and high levels of debt—public, corporate, or household—which still weigh on spending and growth, to varying degrees.
IMF estimate: Long-term growth in advanced economies is now about ½ percentage point lower than it was before the crisis.
Risk identified: These longer-term forces could come together and further reduce incentives to invest.

Primary policy priority: Ensure a sustained rise in private investment by restoring sales and sales prospects.
Monetary policy: With monetary policy in advanced economies having largely accomplished what it can, and borrowing costs still low, policymakers need to look elsewhere for ways to boost growth.
Role for public investment: The case for more infrastructure investment remains:
- In countries where conditions are right (example countries cited: Germany and the United States), public investment can:
- Spur demand in the short term.
- Raise supply in the medium term.
- Through the accelerator effect, give a boost to private investment today.
Overarching message: Keep pushing the accelerator.

Author: David Lipton
Date: July 20, 2015
About IMFBlog: A forum for the views of IMF staff and officials; the IMF is an organization of 191 countries. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Source: The Key to Raising Business Investment: Keep Pushing the Accelerator (IMFBlog, July 20, 2015)