7/4/15: IMF WEO on Global Investment Slump: Part 2: It's Demand, Not Supply ..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment (http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf).

IMF findings focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

I covered chapter’s main findings for questions 1-2 in the earlier post here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-weo-on-global-investment-slump.html

Now, onto the remaining questions and the core conclusions:

Q3: "The overall weakness in economic activity since the crisis appears to be the primary restraint on business investment in the advanced economies. In surveys, businesses often cite low demand as the dominant factor. Historical precedent indicates that business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years. …Although the proximate cause of lower firm investment appears to be weak economic activity, this itself is due to many factors. And it is worth acknowledging that, as explained in Chapter 3 [of the WEO], a large share of the output loss compared with pre-crisis trends can now be seen as permanent."

Here's a handy chart showing as much:

Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)

Q4: "Beyond weak economic activity, there is some evidence that financial constraints and policy uncertainty play an independent role in retarding investment in some economies, including euro area economies with high borrowing spreads during the 2010–11 sovereign debt crisis. …In particular, firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment. Regarding the effect of uncertainty, firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment in recent years, even after the role of weak sales is accounted for."

Here is an interesting set of charts documenting that financial and policy factors played more significant role in depressing investment in the euro area 'peripheral' states:

Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty (Log index).

Note: in Ireland's case, financial constraints (quality of firms' balance sheets) is the only explanatory factor beyond demand side of the economy for investment collapse in 2013-present, as uncertainty (blue line) strongly diverged from the actual investment dynamics.


Q5: "Finally, regarding the apparent disconnect between buoyant stock market performance and relatively restrained investment growth in some economies, the chapter finds that this too is not unusual. In line with much existing research, it finds that the relationship between market valuations and business investment is positive but weak. Nevertheless, there is some evidence that stock market performance is a leading indicator of future investment, implying that if stock markets remain buoyant, business investment could pick up."

Conclusions

• So IMF finds no need for any systemic the supply-side adjustments on capital/credit side.
• It finds no imbalances in the capital markets and finds that demand is the main driver for collapse in investment. 

Where is the need for more 'integration' of the capital markets that the EU is pushing forward as the main tool for addressing low investment levels? Where is the need for more bank credit to support investment? Ah, right, nowhere to be seen…

Meanwhile, the IMF does note the role of debt overhang (legacy debts) in corporate sector as one of the drivers for the current investment slump. "Although this chapter does not further investigate the separate roles of weak firm balance sheets and impaired credit supply, a growing number of studies do so and suggest that both channels have been relevant." In particular, "For example, Kalemli-Ozcan, Laeven, and Moreno (forthcoming) investigate the separate roles of weak corporate balance sheets, corporate debt overhang, and weak bank balance sheets in hindering investment in Europe in recent years using a firm-level data set on small and medium-sized enterprises in which each firm is matched to its bank. They find that all three of these factors have inhibited investment in small firms but that corporate debt overhang (defined by the long-term debt-to-earnings ratio) has been the most
important."

Thus, once again, how likely is it that low cost and abundant credit supply unleashed onto SMEs - as our policymakers in Ireland and the EU are dreaming day after day - will be able to repair investment collapse? Err… not likely.

7/4/15: IMF WEO on Global Investment Slump: Part 1: It's Private Sector Issue..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment.

Titled "PRIVATE INVESTMENT: WHAT’S THE HOLDUP?", IMF paper starts with a simple, yet revealing summary:
"Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since. Investment has generally slowed more gradually in the rest of the world. Although housing investment fell especially sharply during the crisis, business investment accounts for the bulk of the slump, and the overriding factor holding it back has been the overall weakness of economic activity. In some countries, other contributing factors include financial constraints and policy uncertainty. These findings suggest that addressing the general weakness in economic activity is crucial for restoring growth in private investment."

So the key message is simple: investment contraction is not driven primarily by the failures of the financial system, but rather by the weak growth - a structural, systemic slowdown in growth. Full text available here: http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf

Let's take a closer look at IMF findings that focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

The chapter’s main findings are as follows (in this post, I will cover questions 1-2 with remaining questions addressed in the follow up post):


Q1: "The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies." Across advanced economies, "private investment has declined by an average of 25 percent since the crisis compared with pre-crisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s."

Figure 4.1. Real Private Investment (Log index, 1990 = 0)

Q2: "The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward pre-crisis investment trends in either sector."

Figure 4.2. Real Private Investment, 2008–14 (Average percent deviation from pre-crisis forecasts)

Spot Ireland in this…

And per broad spread of contraction, see next:

Figure 4.3. Categories of Real Fixed Investment (Log index, 1990 = 0)

But here's an interesting chart breaking down investment contraction by public v private investment sources:

Figure 4.4. Decomposition of the Investment Slump, 2008–14 (Average percent deviation from spring 2007 forecasts)

This, sort of, flies in the face of those arguing that Government investment should be the driver for growth, as it shows that public investment contraction had at most a mild negative impact on some euro area states (Ireland is included in the above under "Selected euro area").


Next post will cover Questions 3-5 and provide top-level conclusions.

16/7/2012: IMF downgrades growth prospects for 2012-2013

A notably interesting, if worrying, World Economic Outlook update from the IMF today. Titled “New Setbacks, Further Policy Action Needed” the document sounds several key warnings:

• In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness.
• Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.
• Growth in a number of major emerging market economies has been lower than forecast. …these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012 World Economic Outlook.
• These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.
• Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. In Europe, the measures announced at the European Union (EU) leaders’ summit in June are steps in the right direction.
•  The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority.
•  In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.

Some growth forecasts snapshots of the IMF update for 2012 and 2013:

• US gets downgraded on growth for both years by 0.1% from 2.1% in April 2012 to 2.0 in July 2012, and for 2013 from 2.4% to 2.3%.
• Meanwhile, Euro zone gets no change in 2012 forecast (at -0.3%) and a downgrade by -0.2% to 0.7% for 2013 forecast.
•  Let’s recall that Eurozone is Ireland’s ‘hope’ and ‘engine for growth’ according to our Government. And it is expected to perform markedly worse than any other advanced region in both 2012 and 2013. 
•  Note that the most ‘dynamic’ large euro zone economy – Germany – is now expected to grow by a ridiculously low 1.4% in 2013 on top of an absurdly low 1.0% in 2012.
• Elsewhere, China and India both got seriously downgraded in terms of growth prospects for 2012 and 2013 compared to IMF forecasts 3 months ago.

Chart below shows some monetary and banking sides of the euro crisis.

“Overall, global growth is projected to moderate to 3.5 percent in 2012 and 3.9 percent in 2013, some 0.1 and 0.2 percentage point, respectively, lower than forecast in the April 2012 WEO…

Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013, a downward revision of 0.2 percentage point for 2013 relative to the April 2012 WEO. The downward revision mostly reflects weaker activity in the euro area, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest.”

“Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO… Growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area (Central and Eastern Europe in particular).”